Shenmue III begins March 21, 1987. Ryo Hazuki has made his way to Guilin, China in search of his father's killer, Lan Di. There he meets a new travelling companion, Shenhua Ling, and learns of a legend from her village that has foretold their path together. The story continues as Ryo and Shenhua start off on a new journey that will take them farther into enemy territory, deeper into mystery.

Part I: Bailu Village Shenmue III begins in Bailu Village in Guilin. Shenhua begins to suspect that perhaps Lan Di and the Chi You Men abducted her adoptive father, Yunshen Yuan, which would explain his sudden mysterious disappearance, and so she intends to rescue him, her motives overlapping with Ryo's.

Ryo and Shenhua discover that a group of thugs have attacked and raided several stonemasons in search of the Phoenix Mirror, leaving their houses a mess. This includes stonemason Guowei Xu. With the help of martial arts expert JiuSi Sun, Ryo defeats the thug leader, Yanlang. Shenhua interrogates Yanlang and learns her father and Xu are in Niaowu. Ryo and Shenhua are also attacked by familiar face Chai, but Ryo thwarts him away.