Lau Ching, a Mainlander with an incredibly powerful right arm, arrives in Hong Kong to find his cousin. He befriends with a drifter named Handsome, and a martial artist girl named Mandy. In order to woo her, Ching participates in a fighting competition in hopes of winning a $10 million prize, and must defeat his love rival, Wai, in the ring.

Years ago, a village head in the Hong Kong countryside executed a man for committing adultery by drowning him in the ocean. His mistress, in attempts to flee the village, dies when she plummets into a pool of quicksand. Years later, people swimming in the ocean mysteriously vanishes, and their bodies wash ashore days later. A local policeman named Lu Hsien who practices Taoist magic believes a water ghost (presumably the ghost of the adulterer) is responsible for their deaths. Therefore, he joins forces with his colleague, Wang Hsiao-Ming, to rid the countryside of this demon before he can strike again. However, Hsiao-Ming is unaware that the ghost of the mistress, having risen out of her muddy grave, fell in love with him and will see to it that no other person falls for him.

In the fifth century, constant civil war scars western China. To escape death, Ti, a young scout, jumps through a crevice in the Zu mountains where he gets entangled in a great battle against the Blood Demon, a supernatural entity seeking to wreak havoc upon the world.