Li lifted an Olympic record total of 246 kg, comprising an Olympic record 108 kg in the snatch lift and a 138 kg clean and jerk to beat her closest rival, Pimsiri Sirikaew, from Thailand, by 10 kg.
The result reinforced China's lead in the overall medal table and provides a boost for its weightlifting squad after both male and female athletes missed out on gold in Sunday's weight classes.
"It's true that yesterday our teammates didn't have their best performance. However I was not affected by their performances because I know we are a very strong team," Li said.
"Today it is my time to show our strength."
With the competition already won, Li failed in an attempt at a 144 kg clean and jerk that would have set a world record for that style of lift and the overall total.
Thailand's Pimsiri Sirikaew took the silver with a total of 236 kg, while Ukrainian Yuliya Kalina won the bronze.
Eighteen-year-old Smith came 12th, having lifted a total of 211 kg in the earlier B group session, setting a new British record of 121 kg in the clean and jerk to the delight of a raucous crowd in the 6,000-seat ExCel arena.
“I was very pleased that after a disappointing start I was able to come back and perform so well in the clean and jerk,” said Smith.
“It is all going to stand me in very good stead for Rio in 2016. I gave it my best – I am happy that I broke the senior British record for clean and jerk.
"I rushed my second and third snatch. I know myself I always rush it when I am nervous.
"I am just overwhelmed. It is the best and worst day in my life.
“I can't put it into words. I didn't really do myself justice. It all did affect me in the end – my nerves got to me eventually."
Final standings (Snatch, Clean/Jerk, Overall):
1. Li Xueying (China) 108 138 246
2. Pimsiri Sirikaew (Thailand) 100 136 236
3. Yuliya Kalina (Ukraine) 106 129 235
4. Rattikan Gulnoi (Thailand) 100 134 234
5. Boyanka Kostova (Azerbaijan) 105 128 233
6. Jong Chun Mi (North Korea) 101 130 231
7. Nastassia Novikava (Belarus) 103 127 230
8. Kuo Hsing-Chun (Taiwan) 99 129 228
9. Maria Alexandra Escobar (Ecuador) 103 123 226
10. Jackelina Heredia (Colombia) 100 125 225
11. Romela Begaj (Albania) 101 115 216
12. Zoe Smith (Britain) 90 121 211
13. Christin Ulrich (Germany) 93 114 207
14. Yang Eun-Hye (So. Korea) 87 113 200
15. Bediha Tunadagi (Turkey) 87 107 194
16. Annie Moniqui (Canada) 85 105 190
17. Jenlyn Tegu Wini (Solomon Islands) 65 95 160
. Hidilyn Diaz (Philippines) 97
. Lina Rivas (Colombia) 103