Twelve-year-old Dre Parker and his mother Sherry Parker move from Detroit to Beijing after Sherry gets a job transfer at her car factory. After a day in a Chinese park, Dre develops a crush on a young violinist, Meiying, who reciprocates his attention, but Cheng, a rebellious kung fu prodigy whose family is close to Meiying's, attempts to keep the two young ones apart by violently attacking Dre, and later bullies him at school, as Dre is too weak to stand up for himself. During an attack one day, the maintenance man, Mr. Han, comes to Dre's aid, revealing himself as an ancient kung fu master.
After Han mends Dre's injuries using fire cupping, Dre asks if Mr. Han could teach him kung fu to get revenge on his attackers. Han refuses, but meets Cheng's teacher, Master Li, to make peace. Li, who teaches his students to show no mercy to their enemies, challenges Dre to a fight with Cheng. Seeing a poster for an open martial arts tournament, Han instead proposes that Dre compete against Li's students there. He also requests that the stronger students that Li teaches leave Dre alone to train in time for the tournament, in hopes Dre will no longer be bullied. Li accepts the offer, but tells Han that if Dre does not show up, there will trouble for both Han and Dre.
Han promises to teach Dre "real" kung fu and begins to train Dre by emphasizing movements that apply to life in general, and that serenity and maturity, not punches and power, are the true keys to mastering the martial art. He teaches this by having Dre go through various actions with his jacket, which teaches Dre muscle memory moves. Han then takes Dre to a divine temple in the Wudang Mountains where he trained with his father hundreds of years ago, and Dre witnesses a woman making a king cobra reflect her movements, and Dre and drinks the water from a secret, ancient Chinese well for good luck.
As Dre's relationship with Meiying continues, he persuades her to cut school for a day of fun, but when she is nearly late for her violin audition which was brought forward a day without their knowledge, her parents deem him a bad influence and forbid her from spending more time with him.
During the course of their training, Han gives Dre a day off. Dre goes to Han that night and finds Han, apparently drunk, smashing a car he was working on. Han tells Dre that he crashed the same car years ago, and that his wife and ten-year-old son were with him and died in the car crash. Han fixes the car every year - and then smashes it to help him remember the day they died. Dre works much harder in his training in order to help Han get over the incident. Han assists Dre in reading a note of apology to Meiying's father in Chinese; impressed and forgiving, he accepts and promises that Meiying and her family will attend the tournament to support Dre.
At the tournament, Dre is frightened at first, but soon begins beating his opponents and advances to the semifinals. So does Cheng, who finishes off his opponents violently. Dre comes up against Liang, one of Li's more sympathetic students and the least vicious of Dre's tormenters. Under Li's goading, Liang severely hurts Dre's leg. Liang is disqualified as a result, while Dre is taken to the infirmary.
Despite Han's insistence that he has already earned respect for his performance, Dre convinces him to mend his leg by using the ancient Chinese fire cupping technique in order to continue fighting. Dre returns to the arena to face Cheng in the final battle. After Dre takes the lead, Cheng is told by Li to injure Dre's leg again. Dre struggles back up, standing on just one leg, and attempts the reflection technique on Cheng. Cheng begins reflecting Dre's movements and it goads him into charging Dre - but Dre flips in the air and catches Cheng with a kick to his head. He wins the tournament along with the respect of Cheng and his classmates. Cheng, instead of the presenter, awards Dre the trophy, and the Fighting Dragon students bow to Mr. Han in respect, accepting him as their new master.
Who orders Cheng to injure Dre's leg again?
Li