Legend of the Fist: The Return of Chen Zhen is set in the time period before the Second Sino-Japanese War, after the apparent death of Chen Zhen, who was shot after avenging his teacher (Huo Yuanjia) in Fist of Fury. Chen joins a group of Chinese men to help the Allies fight the Germans in France during World War I. He returns to China after the war, taking on the identity of Qi Tianyuan, a fellow comrade who was killed in action.
Back in Shanghai, Chen joins a underground resistance movement to stop the Empire of Japan from invading China. He befriends Liu Yutian, a businessman and owner of a nightclub frequented by foreign dignitaries. At the same time, he is romantically attracted to Kiki, a nightclub singer who is actually a Japanese undercover agent. One night, Chen discovers that the Japanese are planning to assassinate General Zeng, the son of a northern warlord, and push the blame to General Zhuo, a rival warlord. Zeng's death will spark off a civil war between the two warlords and aid the subsequent Japanese invasion. Chen disguises himself as a masked superhero (based on The Green Hornet's sidekick Kato) and defeats the assassins and saves Zeng.
With the operation failed, Tokyo sends a name list of prominent anti-Japanese activists to Colonel Chikaraishi Takeshi, leader of the Japanese secret agency in Shanghai, ordering him to kill the people on the list within a month. Chikaraishi leaks out the list, causing panic among the populace, and pays a visit to the nightclub. Chikaraishi initially finds Chen suspicious, and his doubts are confirmed when he compares a photo of the real Qi Tianyuan with the one stolen from Chen by Kiki. Chikaraishi is aware of Chen's true identity and he challenges Chen to save the people on the list. Chen and Chikaraishi engage in a race of time to save and assassinate the activists respectively, with most of the targets being killed while others manage to escape. Eventually, Chikaraishi's younger brother leads a team of killers to murder the editor of the Shanghai Times, who is a friend and fellow comrade of Chen. Chen fails to save him on time and sees his friend die before him, after which he takes vengeance on the murderers.
In the meantime, Chen figures out that Kiki is a spy and warns her to leave or he will kill her. At this point, Chikaraishi starts to distrust Kiki and he forces her to kill General Zeng's girlfriend, one of her close friends. The blame is placed on General Zhuo and the angered General Zeng attacks Zhuo with support from Japanese forces, starting a war. One night, the Japanese corner Chen on the street and knock him into unconsciousness, before bringing him to their headquarters to torture him. Chikaraishi reveals to Chen that he is the son of the Hongkou dojo's master, who was defeated and killed by Chen years ago. He releases Chen and says that he will personally avenge his father later. Concurrently, Chen's friends stage a raid on the Japanese headquarters and cause serious damage with explosives before fleeing the scene. The Japanese track down Chen's comrades and murder them for revenge later. Chen is thrown out of a car in front of the nightclub and remains in coma for days while he recovers from his injuries.
With the Japanese invasion underway and General Zhuo killed in action with his forces in full retreat, there seems to be nothing that the resistance can prevent the Japanese from occupying Shanghai. Chikaraishi sends Kiki to challenge Chen Zhen to a fight in the Hongkou dojo. Chen accepts the challenge and meets Chikaraishi, who kills one of his comrades and Kiki in front of him. In rage, Chen defeats all the combatants alone, after which he faces Chikaraishi in a one-on-one bout and defeats his opponent eventually. At the end of the film, Chen is seen dressed in his superhero costume, and he continues to help the resistance oppose the invaders.