Clijsters jumped out to an early lead, but the Belgian collapsed in the opening set and played poorly in the second set. Clijsters had won 27 of her previous 30 matches, collecting a third U.S. Open title and the 2010 year-end championship.
Clijsters' three defeats since Wimbledon last July all had come at the hands of Vera Zvonareva, the Russian whom Clijsters would have displaced as the second-ranked player with a victory over Li.
Instead, Clijsters' serve and forehand deserted her when she seemed certain to land her third title in Sydney. She had 27 unforced errors and lost 13 of the last 17 games.
"We've had some really tough battles in the past," Clijsters said. "I didn't played my best tonight, but she did and she deserved to win."
Earlier in the day, Gilles Simon of France won all but three points in the second set to defeat third-seeded Ernests Gulbis of Latvia 7-6 (1), 6-0 and advance to the men's final, where he'll face Viktor Troicki of Serbia. The fourth-seeded Troicki defeated Florian Mayer of Germany 6-4, 7-6 (4) at Sydney Olympic Park.
"OK, I made three points. Bad luck," Gulbis said. "Next time I will make four."
Simon battled a knee injury for six months last year and slipped to No. 41 from a career-high No. 6, but he was pleased with the way his game has rebounded early this year.
"I know on the court I can play three hours even if it's 40 degrees [Celsius] outside," Simon said. "I know that if the match is difficult, if we have to run, fight on every point, at the end it's good for me."
Simon has won all four of his matches against Troicki.