In the Valley of Peace, Po helps his fathers, Li Shan and Mr. Ping, open their new restaurant. Master Shifu then informs Po that he must advance to become a spiritual leader, meaning he can no longer be the Dragon Warrior and must find a suitable successor. Po struggles with choosing the right candidate as he does not want to lose his status. During this time, he encounters a corsac fox bandit named Zhen, who is trying to steal ancient weapons from the Jade Palace. Po outsmarts Zhen and sends her to prison, but learns from mine workers that Tai Lung has returned and destroyed an entire quarry. Zhen reveals that Tai Lung’s return was orchestrated by a sorceress called The Chameleon, who can shape-shift into any animal and copy various kung fu skills by touching them.

With Zhen’s assistance, Po heads to Juniper City to confront The Chameleon, unaware that his fathers are following them, worried about his safety. After a series of encounters, including a brawl in a shifty tavern, they arrive at Juniper City and narrowly escape arrest. They then head to the Den of Thieves, where they receive help from the den’s leader, Han, who is a close friend of Zhen. From there, Po and Zhen proceed to The Chameleon’s lair, but Po is captured. It is revealed that Zhen has been working as a double agent for The Chameleon, tasked with acquiring Po’s Staff of Wisdom, which has the power to access the Spirit Realm. Po almost escapes, but The Chameleon, disguised as Zhen, tricks him and throws him off a cliff. He is rescued by his fathers, who convince him that sometimes change can be beneficial.

Using the staff, The Chameleon summons every deceased kung fu master and steals their skills, including those of Lord Shen, General Kai, and Tai Lung. After escaping, Zhen reunites with Po, but he refuses to back down from facing The Chameleon. She, along with Mr. Ping and Li, returns to the Den of Thieves to rally support. As they battle The Chameleon’s army of Komodo dragons, Po tries but fails to reason with The Chameleon. Although she returns the staff to him, as she no longer needs it, they continue to battle. When Zhen intervenes, The Chameleon transforms into a Chimera of several kung fu masters. After another battle, she shifts into a copy of Po, traps him in a cage, and reverts to her original form. Trusting Zhen, Po gives her the staff, which she uses to best The Chameleon. Po, who was pretending to be trapped, then defeats The Chameleon using the staff and returns the stolen kung fu to their rightful owners. The spirits, including Tai Lung, show respect to Po and return to the Spirit Realm, taking The Chameleon with them.

Returning to the Valley of Peace, Po chooses Zhen as his successor, much to Shifu’s annoyance. Confident in his decision, Po and the Furious Five help train Zhen to become the next Dragon Warrior.