Continuing from where the first film ended, Wing Chun master Ip Man and his family move to Hong Kong in the early 1950s after their escape from Foshan. There, Ip desires to open a school to propagate his art, as well as to make his living, but he has difficulty attracting students due to his lack of reputation in the city. One day, a young man named Wong Leung appears and promptly challenges Ip to a fight, but is easily defeated. Wong leaves humiliated, only to return with some friends to gang up on him. Ip beats them as well. Stunned and impressed by his skills, Wong and his friends become Ip's first students, bringing more disciples to help the school thrive.
Wong is later caught posting promotional posters for the school by some Hung Gar students. One of them challenges Wong to a fight and loses, but his friends take Wong hostage in revenge and demand a ransom from Ip. Ip goes to the local wet market as directed, but the meeting ends in a confrontation with a growing mob of Hung Ga students. Ip and Wong fight their way outside to meet Jin Shanzhao the martial artist and former bandit in the first film who comes to their rescue with his own gang. The students' master, Hung Chun-nam, arrives to break up the fight. Ip introduces himself, and Hung informs him that before setting up a school, he needs to attend a special fighting ceremony to test his skill. Ip, Wong and Jin are subsequently arrested by Officer Fatso for disturbing the peace but are later released on bail. Hung and Fatso are then shown to be acting as reluctant collectors for the martial arts schools (including Hung's) as part of a protection racket headed by Superintendent Wallace, a corrupt officer in the Hong Kong police.
Ip attends the ceremony and defeats his first challengers, and then strikes a draw with the last challenger, Hung. Ip is allowed to keep running his school on the condition that he pay the monthly protection fees, but he declines. Hung thus has his students loiter in front of the Wing Chun school and harass anyone interested, causing a street brawl between them and Ip's disciples. Ip is thus forced to close up and move the school nearer to home. Ip soon confronts Hung and nearly engage in another fight before being interrupted by Hung's family. Ip leaves, and the next day, Hung invites him to a British boxing match he had helped to set up, quietly coming to terms with him.
The boxing competition begins with the various martial arts schools demonstrating their skills. However, the event's star boxer, Taylor "The Twister" Milos, openly insults and attacks the students, causing chaos as the masters try to restore order. Hung accepts Twister's challenge to a fight so that he can defend his culture. Although Hung has the upper hand at first, he begins to weaken from asthma and is eventually beaten to death. News of Hung's death rapidly spreads throughout the enraged Chinese populace, causing a scandal that spurs Wallace to hold a press conference, where he states that Hung's death was an accident, and Twister announces that he will accept any challenge from the Chinese. Ip arrives and accepts the challenge.
As his wife goes into labor, Ip finishes training and begins his fight with Twister. Ip manages to exchange blows with the boxer but is knocked down many times, but in the end he finally manages to knock him out. While the Chinese audience cheers, Wallace is arrested by his superiors for corruption, as Fatso had secretly reported him. Ip then gives a speech to the audience, stating that despite the differences between their races, he wishes for everyone to respect each other. Ip goes home and reunites with his family, including his newborn second son, Ip Ching.
A final scene shows Ip being introduced to a boy who wishes to study Wing Chun: Bruce Lee. Ip smiles and simply tells the boy to come back when he is older.