Arsenal sub keeper Emiliano Martinez was the shoot-out hero in the sweltering heat of Shanghai.
Martinez made two saves from David Alaba and Juan Bernat as Arsenal beat the Germans on penalties.
It came after Alex Iwobi's injury time leveller cancelled out Robert Lewandowski's early penalty.
Aaron Ramsey, Nacho Monreal and Iwobi were on target from the spot for Arsenal who then lifted the trophy.
But the scorching temperature saw players really struggle as Sead Kolasinac looked ill before coming off while Per Mertesacker also pulled out just before kick-off.
Steve Bould update
Steve Bould has missed Arsenal’s trip to China after having to undergo surgery in Australia.
Arsenal assistant boss Bould was missing from the bench from the friendly with Bayern Munich because he had a hernia in his neck.
It flared up during Arsenal’s week in Australia and he has now returned to London.
Arsenal boss Arsene Wenger said: “Steve Bould has a hernia on his neck and had to do it in Australia and he couldn’t travel. He went home on Saturday. He’s OK. He went home and he’s good.”
Granit Xhaka in focus
The Swiss midfielder took some time to settle last season after his £34m move to the Emirates, writes John Cross.
But Xhaka really came good in the latter part of the campaign, enjoying playing in central midfield in the new 3-4-2-1 system which bings the best out of the box-to-box midfielder.
Down the years, Arsene Wenger has made many a signing who has taken a year to adapt and then gone on to be a top class player. Robert Pires springs immediately to mind.
Arsenal will be hoping that Xhaka’s sharpness and impressive form in pre-season is an extension of his good performances in the run-in last term.
He is strong, powerful, made a vital goal saving clearance and has an excellent range of passing.
Once again, Xhaka was solid and his positional sense and discipline has noticeably improved. A big season awaits.
Player ratings
John Cross was in Shanghai to watch the game, here are his player ratings...
Cech 8 MotM. Made a string of terrific saves to deny Bayern. Looks sharp and ready for the season.
Bielik 6 Started on the right of a back three, he is clearly pushing for the first team this season.
Elneny 6 Drafted in after Mertesacker fell ill, good on the ball but finding his feet in defence.
Monreal 6 Now a mainstay in Arsenal’s back three, Monreal still struggled against Bayern’s forwards.
Maitland-Niles 5 Got horribly exposed by Ribery’s pace, class and movement. Conceded a penalty.
Xhaka 7 Made one vital goal saving clearance. Carried on his form from end of last season.
Coquelin 6 Has looked very sharp so far in pre-season. Has clearly worked hard and fighting for his place.
Kolasnic 6 Solid enough, saw off James Rodriguez but then appeared to fall ill before coming off.
Ozil 7 Sharp and lively, Ozil made some good passes and unlocked Bayern’s defence.
Welbeck 7 Looked good on the left, worked hard in the heat and put over some good crosses.
Lacazette 6 Went clean through but was denied by Starke. Looked lively but subbed at half time.
FT. Arsenal 1-1 Bayern Munich (Gunners win 3-2 on pens)
Arsenal have won this International Champions Cup match.
Wenger will be proud of how his team dug in to grind out a result there, even if large swathes of the performance were pretty unimpressive.
Iwobi and Cech’s performances were the highlights for Arsenal while Elneny and Maitland-Niles both managed to play 90 minutes for the first time on tour.
Penalty shoot-out: Arsenal win 3-2
Arsenal: Scored/missed/scored/scored.
Bayern: Missed/scored/scored/missed/missed.
End of normal time: Arsenal 1-1 Bayern Munich
A tough 90 minutes for Arsenal that looked, at least early on, likely to produce a heavy defeat has ended with a draw.
Arsenal’s football was turgid and lacking rhythm on a hot and humid night in Shanghai but they weathered numerous rough patches and took one of the three good chances they produced all match.
Now for the penalties...
GOAL! Arsenal 1-1 Bayern Munich (Iwobi)
A lovely break from Arsenal in the final minute produces a goal.
Iwobi picks up the ball in his own half and goes on the attack, he finds Ramsey on the left flank and the Welshman plays a first time cross into the box.
Iwobi bursts into the area to meet it and heads in the equaliser.
90 mins
Sanches shows why he is so widely-rated. The young Portugal midfielder produces some lovely skill while dribbling before scooping the ball over Arsenal’s defence to play in Bernat, whose shot is saved.
Four minutes of added time.
87 mins
Big chance for Bayern but it is wasted by Alaba.
Bernat breaks down the left and crosses into the six yard box. All Alaba has to do is tap it in but instead he decides to spin and attempt a back-heeled volley.
Needless to say, it doesn’t come off.
85 mins
Little attacking quality on show from either side but if anyone is going to score, Bayern look the more likely.
Coman embarks on a brilliant run before being hacked down by Willock, who is booked.
79 mins
It’s all getting a bit scrappy now. Both sides have made so many changes that there is very little rhythm to the match.
Ramsey looks bright and has definitely improved Arsenal since coming on but he’s trying to do too much himself.
Walcott, meanwhile, cuts into the box from the left flank, opens up his body and shoots. His effort is easily saved, though.
73 mins
A few more substitutions for Arsenal.
Nketiah comes on for Welbeck and Martinez replaces Cech, who is applauded off by the vast majority of the stadium.
70 mins
The pace of the game has slowed considerably nut Nelson still looks lively.
The young winger produces a quick step-over and is brought down outside the box.
Nelson takes the free-kick but soon finds the ball back at his feet. He’s showing off a bit now with some more step-overs to evade Ribery. He eventually asses to Maitland-Niles, who loses the ball.
65 mins
Arsenal press the Bayern defence and Rafinha scoops the ball up in the air. Iwobi uses his strength to get the ball down in the box but he never really gets it fully under control.
His shot is blocked but he wins it back and is then fouled on the edge of the box.
Nelson sends the free-kick into the box but it is poor and sails over everyone’s heads.
62 mins
Arsenal have looked a bit more solid at the back in this second half but they have been far worse offensively.
Ramsey is brought on for Xhaka as Wenger looks for more drive through the midfield.
58 mins
Tolisso flies into a challenge on Elneny — but somehow comes off worse.
The Arsenal man did very little wrong there but has still been booked.
Free-kick to Bayern 30 yards out. Alaba takes it but Cech saves comfortably.
55 mins
Maitland-Niles gets fed up with Ribery and decides on a strong challenge, almost resulting in another penalty.
The youngster clears the ball but follows through on the Frenchman, who writhes around on the floor.
52 mins
Bramall gets forward for Arsenal and is brought down 30 yards from goal.
Walcott and Xhaka stand over the free-kick but the England forward smashes it into the wall.
49 mins
Another huge chance for Bayern is wasted by James.
Coman breaks down the left and crosses for Lewandowski, who leaves it for James behind him. The Colombian hits it first time but again Cech is there to make the save.
We're back underway
A few changes for Wenger, who also brought on Nelson just before the break.
Walcott and Iwobi have come on for Ozil and Lacazette. Willock has replaced Coquelin and Bramall is on for Bielik.
It sounds like Kolasinac was taken off as he was suffering with the same illness that caused Mertesacker to withdraw before kick off.
It would also explain his performance, which seemed a little sluggish.
The second half is just a minute or two away now...
HT. Arsenal 0-1 Bayern Munich
A disappointing half for Arsenal, who will be pleased to make it to half time just one goal behind.
Ozil and Lacazette both had chances to score but that doesn’t hide the fact they have been second best in almost every area of the pitch.
Had Martinez or Ospina been in goal rather than Cech, Arsenal could be two or three goals behind.
Ribery is pulling the strings for Bayern at the moment. The Gunners will be hoping he’s subbed off at the break...
43 mins
Maitland-Niles is having a tough time up against Ribery today. The Arsenal youngster is struggling to cope with his dribbling and looks nervous after giving that penalty away.
Cech, meanwhile, is keeping Arsenal in this game and has made two more excellent saves. The last one was from James, who really should have scored after receiving the ball just outside the six yard box.
Kolasinac has been subbed off for 17-year-old Nelson. Hard to tell if that was tactical or due to an injury.
38 mins
Muller goes close to extending Bayern’s lead but Cech keeps his effort out.
The ball is worked to Muller on the edge of the box and he shoots first time. Monreal gets a foot on it and the ball seems to be heading over Cech’s head.
The former Chelsea man reads the deflection well, though, and palms it out for a corner, which is wasted.
33 mins
Lacazette misses an excellent chance to equalise.
Ozil plays a delightful ball into the Frenchman but, one-on-one, he fails to score.
To be fair, it was brilliantly agile save from the Bayern keeper.
30 mins
Half an hour gone and the players are stopping for a short drinks break.
Both coaches take the opportunity to have a quick word with their teams.
James, making his debut, seems to have hurt his wrist and is having it wrapped up in a bandage.
27 mins
Both Ozil and Coquelin took a lot of stick last season with plenty of fans suggesting the latter is not good enough for Arsenal. They have been Arsenal’s stand-out players in this game so far, though.
Coquelin is doing more than his share of running, breaking up attacks. Ozil, meanwhile, is even showing a bit of physicality in 50/50 challenges.
23 mins
Lacazette wins a corner and Ozil whips it in. Bayern’s defenders clear easily, though.
Arsenal come back at them and Ozil again crosses it in with similar results.
Meanwhile, both Coquelin and Martinez have picked up their customary yellow cards.
21 mins
Arsenal are seeing a bit more of the ball in Bayern’s half but are struggling to create anything meaningful.
The ball is being worked wide to Monreal, Ozil and Kolasinac, who are then crossing it in. The problem for Arsenal is that only Lacazette is waiting in the box to receive the crosses and he is yet to get on the end of anything.
17 mins
Bayern are in complete control here and could have already added to their lead.
This Arsenal team includes two new signings, two youngsters and a midfielder playing at centre-half. Unfortunately for Arsenal fans, that is creating a complete lack of cohesion.