Chun Li is a young cop in Hong Kong, a city where crimes are daily occurrences. As the tentacles of Shadaloo squeeze ever tighter on the city’s underworld, the Hong Kong Police Department are forced to take more aggressive actions to stop this criminal organization.
Meanwhile, Dan Hibiki and his father Go open a new dojo in the city, when Shadaloo thugs appear and try to force them into paying them “protection” money. When Go uses his fists to refuse, Sagat sets out to show him that no one messes with Shadaloo.
In Shadaloo Headquarters, M. Bison relates the history of China’s first Emperor, Qin Shi Huang, to a large, hooded man that stands in the shadows. He says that the Emperor built the world’s greatest wall, and when his death grew near had a amazingly ornate death chamber constructed. Within this chamber he had artists sculpt him hundreds of stone Terracotta Warriors to protect him. When they finished, the sculptors were then buried alive in the chamber, to protect its secrets. The Terracotta warriors were imbued with the souls of the doomed men, creating a large store of spiritual and psychic power. Bison tells the man in the shadows that he is to oversee Shadaloo operations in Hong Kong and procure a number of the Terracotta warriors for him, so that the energy within them can be used for the Psycho Drive program. The man promises he will not fail.
One month later, in Hong Kong, Chun Li and her partner, Po Lin (who have been working together since their first day at the academy), are speeding down the road in their patrol car, pursuing a stolen vehicle. The crazed chase ends when the stolen car makes an insane jump from the top of a parking garage to a nearby roof, and, much to Chun Li’s dismay, Po Lin follows suit, smashing their squad car into the other vehicle.
The crooks open fire on the policewomen, then make a break for it, splitting up as they do. Po Lin chases down and tackles her crook first, and sees that he has the winged skull Shadaloo insignia tatooed on his wrist when she handcuffs him. Chun Li takes a bit longer to stop her suspect, but after a brief fight she knocks him cold and discovers a work schedule of some kind on his person. In the mean time, Po Lin has beaten some info out of her crook, and discovered that they are Triad footsoldiers, and the Triad has partnered with Shadaloo for some big operation. She also finds out that the man running the op is named Sagat.
Later, Go Hibiki and his son, Dan, finish hanging the sign for their new Dojo. Suddenly a group of toughs pull up and tell Go that he’s in Shadaloo territory and admission will be 10,000 Hong Kong dollars. Go refuses and beats the thugs senseless when they come at him. Retreating, one of them yells that Go has no idea what he has just started.
At police HQ, Chun Li and Po Lin inform their superior and Dorai, Chun Li’s father (who happens to be the agent assigned to deal with all things Shadaloo), what they learned from the two crooks they caught earlier. Dorai says that Shadaloo is ingrained in every aspect of the criminal underworld, which will make figuring out what this mysterious large operation they are planning is about very difficult.
Chun Li and Po Lin ask to be part of the Shadaloo taskforce, but Dorai is unsure. Having recently returned from an undercover mission, he knows firsthand what both Shadaloo in general and Sagat in specific are capable of. He says Sagat is Bison’s right hand man, and that his involvement makes things dangerous – maybe too dangerous for the two policewomen. Addressing the Chief directly, Chun Li disagrees. She says that Po Lin and herself are no longer rookies and have a performance record that speaks for itself. Saying that they understand the dangers, Chun Li tells her father that he can’t protect her from this. Dorai agrees, and tells the Chief that he thinks the two women should be put on the Shadaloo taskforce. Chun Li tells him that she will make him proud.
Afterwards, as they change clothes in the locker room, Po Lin tells Chun Li that this case means a lot to her because, two years before she joined the academy, her parents were both caught in the crossfire of a drive by shooting done by Shadaloo-linked thugs. She says she joined the academy specifically to stop Shadaloo.
Elsewhere, the group of thugs that Go Hibiki tore through earlier approach Sagat as he works out in a boxing ring. They tell him that Hibiki refused to pay the Shadaloo “property tax.” “So you wish for me to lower myself to handling a simple territorial dispute – something all of you were apparently too inept to handle yourselves?” Sagat asks, glowering down at them. As the men attempt to sputter out a response, Sagat cuts them off as, with a grin, he says that, fortunately for them, he’s in the mood for a workout. As we get our first clear glimpse of Sagat and see that, at this point in time, he still has both of his eyes, Sagat says that he hopes Hibiki will present a challenge.