In-form Sharapova had conceded only nine games leading into the match but was picked apart by sixth seed Li, who attacked the Russian's serve and overpowered her with a barrage of power hitting from the baseline.
Li, who lost to Kim Clijsters in the 2011 final, will play Victoria Azarenka or Sloane Stephens for her second grand slam title.
"Everyone could be nervous in the final," Li said courtside after completing the rout in one hour and 33 minutes. "I have to enjoy (the) tennis. Nothing better. Looking forward to the final."
Questions over Li's mental strength have dogged her throughout her career but she was composure personified on Thursday, weathering a fierce challenge on her serve in the second set and coolly closing the semi-final out on the second match-point when Sharapova found the net.
Brimming with confidence, the Chinese late-bloomer will be hard to beat in the final at Melbourne Park, where she has consistently played some of her best grand slam tennis.
"I think she played a really great match, she was much more aggressive than I was and dictating the play," Sharapova told reporters. "There's no reason why she can't (win the final)"
2011 French Open champion Li has become known for clawing her way back into matches after allowing opponents a headstart but the 30-year-old Chinese was on the offensive from the start.
Asia's first grand slam single champion unleashed a searing backhand winner down the line to pressure Sharapova at deuce in the first game and broke the Russian when she prevailed in a fierce baseline skirmish.
Keeping Sharapova pinned to the baseline and jumping on her second serve, Li raced to a 4-1 lead courtesy of an imperious backhand down the line on the third break-point of the game.
Sharapova, struggling to breach Li's defences with her serve, smacked a huge backhand return to claw back a break but was broken again when she netted.
Li marched on to raise three set points, closing it out in style by blasting a cross-court forehand that kissed the line.
With the temperature rising above 34 Celsius (93F), Sharapova began to take swings at everything Li threw at her and raised a breakpoint at 1-0, but the Chinese showed nerves of steel, cancelling it out with a cross-court forehand winner that grazed the line.
Li pressed again at 2-2, with Sharapova conceding a second break point in the game with her fifth double-fault and then smacking a backhand long to fall behind 3-2.
Li ripped three huge serves to stave off a breakpoint in the following game, enjoying a rush of confidence that she rode to victory.