After returning to Mount Liang, Song Jiang seeks to establish his own Red Dynasty, enticing Wang Ying, Shi Qian, Yang Zhi and others to join him in creating a seven-member “Party Congress”. Dismayed by what he sees, Li Kui gets drunk and speaks out, but is reported by spies and sentenced to be flogged 40 times. In desperation, Sun Erniang hatches a plan. She gets Li Kui to steal Song Jiang's time machine, and travels to Canada to seek out Song Xiaohai.
In his dream, Li Kui hears Taoist priest Gongsun telling him that he needs to find a way to expel evil in order to save the Heroes of Mount Liang. And so, Li Kui forces Song Xiaohai to accompany him on a visit to the Red Dynasty. With no alternative, and because he is concerned about live organ harvesting and the human corpse exhibition, Xiaohai promises to go with Li Kui to the “evil-ridden” city of Chongqing. To get more insider information, Xiaohai asks Li Kui to serve as the bodyguard of Huang Lijun, who was inadvertently saved. After further investigation, Xiaohai and Li Kui finally learn the truth about the Chinese Communist Party's involvement in human organ harvesting and trafficking as well as the corpse processing plant which makes human specimens for profit; they also witness the falling-out between Bo Xishan and Huang Lijun. Ultimately, they realize that “the demise of the Communist Party is inevitable”.
To help Song Jiang cleanse his body of evil spirits, Song Xiaohai suggests that he comply with the Will of Heaven in accordance with the principles of Confucianism, Buddhism and Taoism. By this time, however, Song Jiang is already on the verge of death; as it turns out, he has completely distorted the teachings of Confucianism as well as the Heart Sutra of Buddhism. Driven to despair, Song Xiaohai and Li Kui make their final attempt. They tell him about of the decline of the present-day Red Dynasty. Under the enormous energy of the Hidden-Character Stone, Song Jiang is finally rid of the evil that had possessed him, and Mount Liang is restored to its original state.
Song Jiang, while helping Song Xiaohai rescue his father, is possessed by evil Communist spirits after attending the Red Dynasty's Party school. After returning to Mount Liang, Song Jiang begins to build his own miniature “Red Dynasty”. Li Kui speaks out against what he sees, but the smooth-talking Song Jiang assures him that everything is fine. Seeing all of this unfold, Taoist priest Gongsun Sheng gasps in dismay.
Mount Liang implements communist rule, establishing cooperatives and communal eating, leaving Sun Erniang and her husband Zhang Qing to suffer untold misery. Li Kui, too, suffers as a result of not bribing Wang Ying. After getting drunk and complaining, he is reported by a light-footed spy and flogged 40 times as punishment. In desperation, Sun Erniang hatches a plan. She tells Li Kui to steal the time machine and go to Canada in search of Song Xiaohai.
Li Kui travels to Canada to search for Song Xiaohai. To make a living, he tries his hand at several jobs, but none are the right fit. In his dream, Li Kui sees how the Heroes of Mount Liang are cruelly tormented by the evil spirit of the Communist Party. After Li awakens, priest Gongsun tells him to search for a way to purge this evil and save Mount Liang.
After asking for leave from the Editor-in-Chief (Mr. Gu), Song Xiaohai accompanies Li Kui on a trip to the Red Dynasty. Mr. Gu tells Xiaohai to carefully investigate the human corpse exhibition. After some keyword filtering, Li Kui and Song Xiaohai decide to go to Chongqing and see firsthand what “evil-ridden” really means. As if by divine providence, they inadvertently save the so-called “crime-fighting hero”—Huang Lijun.
To obtain more insider information, Song Xiaohai gets Li Kui to become Huang Lijun's bodyguard. As a result of higher-level infighting, someone starts looking into the truth about organ harvesting and corpse processing plants to prevent Bo Xishan from becoming a member of the Politburo Standing Committee, and the Central Commission for Discipline Inspection (CCDI) investigates Huang Lijun. To protect themselves, Bo Xishan and Gu Xiaosan launch their plan to kill off witnesses; meanwhile, Huang Lijun and Bo Xishan become enemies.
Outside Huang Lijun's office, Song Xiaohai and Li Kui overhear CCDI officials and Huang Lijun mention a “corpse factory”. Xiaohai cannot help recalling what David Kilgour said during an interview in Canada. Xiaohai receives information, confirmed by Jason, that the von Hagens corpse processing plant is located in Qixianling, Dalian. Li Kui and Xiaohai decide to pay a visit to this factory and see it for themselves.
Song Xiaohai is despondent over the brutal reality of organ harvesting and trafficking; Li Kui is so angry that he wishes he could strangle Bo Xishan and Huang Lijun. At this moment, Priest Gongsun appears before them, telling them to wait for the right moment to make a move. After obtaining evidence that Gu Xiaosan killed Neil Heywood, Huang Lijun negotiates with Bo, but gets only a slap in the face. In desperation, Huang gathers all relevant documents, and, after dressing up as his wife, flees to the U.S. Consulate.
After his experience with the Red Dynasty, Song Xiaohai finally realizes “the collapse of the Communist Party is inevitable”. In order for the Heroes of Mount Liang to be saved, Song Jiang must learn the truth, comply with the mandates of Heaven, and stop seeking to establish his own Red Dynasty. Li Kui is equally anxious to return to Mount Liang with Xiaohai. By this time, however, Mount Liang is already enveloped by evil, and many of the Heroes have been possessed by this evil spirit without even realizing it.
To help Song Jiang cleanse his body of evil spirits, Song Xiaohai suggests that he comply with the Will of Heaven in accordance with the principles of Confucianism, Buddhism and Taoism. Taoist priest Gongsun disapproves, while Wu Yong is willing to give it a try. By this time, however, Song Jiang is already on the verge of death; as it turns out, he had completely misunderstood the meaning of the Confucian classics, leaving everyone in a desperate state between laughter and tears.
Gongsun Sheng, Wu Yong, Song Xiaohai and Li Kui try every means to help Song Jiang, including turning to Confucian and Buddhist texts. Unexpectedly, however, Song Jiang modifies the Buddhist Heart Sutra for his own purposes, transforming it into the Communist Scripture. Driven to despair, Song Xiaohai and Li Kui make one last attempt, gathering at the Hall of Justice and telling of the decline of the Red Dynasty. Using the enormous energy of the Hidden-Character Stone which reads “the Chinese Communist Party Collapses”, they finally rid Song Jiang of the evil spirits that had taken hold of him, and restore Mount Liang to its original state.