Williams, playing in her first semi-final since the 2010 U.S. Open, looked to have a back problem and was limited in her serve speed which was hovering around a slow 75 mph mark.
The American, who has comeback from illness this year, double-faulted on break point to go 3-2 down in the first set but, relying on her return game, she battled back to 5-5.
But another crucial double-fault on game point allowed Li to sneak back ahead 6-5 and then wrapup the set.
After receiving an on-court massage to her back, Williams roared back in the second set to win five consecutive games en route to taking it 6-3 to level the match.
But the exertion of her comeback cost her in the third set where she ran out of energy and was convincingly beaten 6-1 as Li went in for the kill.
Li, the ninth seed, is a perfect 5-0 in her semi-final matches this year but has yet to win a final.