Most of the beat-em-up games we've seen so far has been arcade ports (with the exception of the first three Hokuto no Ken games). The Kung Fu was obviously meant to be an arcade game in spirit, with Spartan X's DNA flowing strongly through it. The PC Engine was marketed as the next evolution of current consoles after all, so it needed something to set a fairly standard game like this apart from its contemporaries on the Famicom/NES and Mark III/Master System. That something would be giant character sprites, standing nearly the entire height of the screen.
The story is about as standard as it gets: An assassin by the name of Wang (who looks remarkably like Bruce Lee) sets out to defeat the Dark Emperor and save the country that he has overtaken. To do this he must of course use his own kung fu to defeat other martial artists, and eventually the Dark Emperor himself (who turns out to be nothing more than a stereotypical practitioner of drunken kung fu). There are four stages (along with a bonus stage in which you stop a cursor on a power gauge in order to break a large pot), each divided into 3 separate parts that contain a boss at the end. You get three lives and up to two health meters to make your way through these stages, though it is possible to earn more through score and oolong tea power-ups (in the case of health).