Li ended the second seed's spectacular run through the draw when she stopped her with a 6-2 6-2 win in 1 hour 33 minutes.
She will meet defending champion Victoria Azarenka in the final after the Belarussian defeated young American Sloane Stephens in the other semi-final.
Sharapova made an ominous start with a double fault on the first point of her opening service game and was broken for the first time in the tournament when she netted a return.
Li held to lead 2-0 then broke again for 4-1 with a cross-court return.
Sharapova fought her way to three break points in the sixth game and finally secured the break when the Chinese player missed a return.
Li returned the favour in the following game to lead 5-2, meaning - in less than a set - the Russian had lost the same number of games as she had in her first four matches combined.
The sixth seed served for the set, racing to 40-0 then wrapped it up in 48 minutes.
Li took the first service break in the second set to remain on track with a 3-2 lead, grabbed a second at 5-2 and served out the match.
Sharapova saved one match point but her bid ended on the second.
The 2008 champion, had set a new Australian record in conceding just nine games in all her matches en route to the semi-finals.
The pair had met 12 times previously with Sharapova holding an 8-4 win-loss record.
The Russian won all three of their clashes in 2012.
Li was a huge hit as she made her way to the 2011 final, before losing to Belgian Kim Clijsters, and has lost none of her crowd appeal.
"Every time I come back here ... I don't know what it is - I always play well here," Li said.
She has credited her competitiveness at 30 to a rigorous off-season routine with coach Carlos Rodriguez, but said she was ready to be self-motivated now.
"He doesn't need to push me any more - I will push me," she said.
Li said she planned to simply enjoy her final against Azarenka or Stephens.
"Everyone will be nervous in a final but I will try to enjoy it for the tennis - there's nothing better," she said.
Sharapova said she felt powerless against Li on Thursday.
"She played a really great match. She certainly was much more aggressive than I was and was dictating the play," Sharapova said.
She said she could not use the fact she had breezed through her previous rounds as an excuse.
"When I go into any match, I try to win with the best scoreline I can.
"I felt I had my fair share of opportunities - I just didn't take them," she said.