Continuing from where the first film left off,Wing Chunmaster Ip Man and his family move toHong Kongin the early 1950s after their escape from the Japanese. Ip Man decides to open a school to teach Wing Chun and propagate the martial art, as well as make his living. However, as Ip Man's fame is not well known in the region, he has a hard time looking for students. After more than a week, a young man namedWong Leung(Huang Xiaoming) appears and asks to be taught Wing Chun. Upon first meeting the unassuming Ip, Wong challenges him to a fight and declares he will take him as his master and pay his school fees if he loses. After a couple of rounds of sparring, Ip easily defeats Wong, sending the humiliated young man leaving and coming back with a group of his friends who attempt to gang up on Ip. However, they are no match for Ip as he beats them. Stunned and impressed by his skills, Wong and his friends become his students. Eventually, Wong brings in additional students.
One day, while Ip is out shopping for his family, he encounters his old friend Chow Ching-chuen (Simon Yam), who has become a beggar. Ip meets his son Kong-yiu, who tells him that his father sufferedbrain damagefrom a gunshot wound to the head while fleeing from the Japanese during theiroccupationyears ago. As a result, Chow no longer recognises anyone. Ip is saddened by his friend's fate and offers to help Kong-yiu take care of his father. He also helps Kong-yiu by finding him a job in a newspaper agency run by Leung Kan (Pierre Ngo), who earlier helped Ip find a suitable location for his Wing Chun school.
Meanwhile, Wong is caught pasting leaflets promoting Ip's school by Cheng Wai-kei and his friends, who are students practisingHung Ga. Cheng challenges Wong to a fight but loses. Although Wong won the fight, Cheng and his friends beat him up and take him back to their territory in thewet market. Ip receives word by the Hung Ga students to go and rescue Wong with money. When he reaches the market, Ip declares he has no money to give them and ends up in a huge fight with increasing numbers of Hung Ga students. Ip and Wong fight their way outside to meet Jin Shanzhao (Fan Siu-Wong), the martial artist and former bandit in the first film, with a group of his market co-workers who come to their rescue. Before things get more complicated, the local Hung Ga school master, Hung Chun-nam (Sammo Hung) arrives and breaks up the fight. However, Hung only listens to his students' side of the story and gets into a misunderstanding with Ip over their martial arts. Hung tells Ip that to set up his own school, he must be subjected to challenges posed by other martial arts masters in order for his Wing Chun art to be recognised. Ip, Wong and Jin are subsequently arrested by Fatso (Kent Cheng) for disturbing the peace. Later, Ip's wife Wing-sing, who is pregnant with their second child, goes to bail her husband out with money from Leung. Hung collects money from the other masters and himself to give to Superintendent Wallace of the police force monthly asprotection fees.
Ip comes to the martial arts association hall to be subjected to fights with other martial arts masters. After winning in every fight culminating with adrawwith Hung, Ip is allowed to keep running his school though he is ordered to pay up his monthly protection fees, which he refuses. Later, Hung's students stop people from joining Ip's Wing Chun school, which eventually causes a fight between them and Ip's students on the streets. Ip is forced to close his school due to residents' complaints. He goes to pay a visit to Hung to ask him to stop bothering him and his students. After a talk about the importance of one's family and beliefs, Ip and Hung come to an understanding, with the latter beginning to show respect for the Wing Chun master. He invites Ip and his students to a boxing competition held by the British to witness how the foreigners fight. Hung and his students help the British set up the location of the competition but almost come to blows with Wallace over his refusal of payment for their work.
The boxing competition begins with the various martial art schools displaying their skills at the openingceremony. However, the boxing champion Twister (Darren Shahlavi) looks down on the Chinese martial arts and goes to the ring to openly taunt and beat the students, causing chaos as the masters try to break up the fight. As the reputation of the Chinese martial arts is at risk, Hung accepts a challenge by Twister to a fight. At first, both fighters are evenly matched, but Hung begins to weaken fromshortness of breathand beaten severely. Although Ip tries to persuade Hung to stop the fight, the Hung Ga master is determined to prove himself and regain his fellow Chinese's honour and spirit. Ip and the other masters can only watch Hung helplessly as he is beaten to death by Twister.
News of Hung's death rapidly spread through the enraged Chinese populace. Leung is arrested by the police under Wallace's orders for revealing the truth in the competition in his newspapers and is beaten by the superintendent, but Fatso sets him free without further harm. Later, he assists Leung with his news by giving out information of his superior's corrupt dealings in the police force. Meanwhile, Wallace holds a press conference stating that Hung's death was an accident, with Twister announcing that he will accept any challenge from the Chinese out of goodwill. Ip arrives and challenges Twister to a duel to uphold the Chinese pride and honour.
While Wing-sing goes intolabor, Ip begins his fight with Twister in the boxing competition. Like Hung, Ip is evenly matched with Twister as the boxer is much tougher and stronger in his blows. After an attempt by the British to disallow Ip to use kicks during the fight, Ip is severely beaten several times by Twister. Eventually, he finds a way to get to Twister's weak spots and defeats the boxer. As the Chinese audience cheers, Wallace is arrested by his fellow officers in the police force thanks to the information publicised by Leung and Fatso. Ip gives a speech to the British people, stating that both Chinese and Western martial arts, although different in many ways, are equal and that both races should come to understand and respect each other. Ip goes home and reunites with his family, with Wing-sing having successfully given birth to their second child. A final scene shows Wong introducing a 10 year old boy to Ip who wishes to study Wing Chun:Bruce Lee. However, Ip tells the boy he should come back to him later when he is older. Years later, Bruce Lee, in his teenage years, begins to study Wing Chun under the tutelage of Ip.