Li Na, 30, defeated the world number two 6-2, 6-2 in 1hr 33min and will now meet the winner of Thursday's second semi-final between world number one Victoria Azarenka and American teenager Sloane Stephens.
"Every time I'm back in Australia, I always feel something here," said Li, the 2011 runner-up. "I always play well here. Everyone can be nervous in a final, so I have to enjoy it. I'm looking forward to the final."
Sharapova had lost only nine games in her march to the semi-finals, a tournament record, but Li was always going to provide a far sterner test despite trailing 4-8 in their head-to-head.
And the Russian started disastrously with consecutive double faults as she was broken in the opening game.
Four-time major-winer Sharapova could have returned to world number one if she had won her second Australian Open title, but Li's ball-striking had her on the back foot from the beginning.
Benefiting from her intense off-season fitness training under new coach Carlos Rodriguez, Li was untroubled by sweltering heat in Melbourne and broke for a second time to take a 4-1 lead.
Her serving was steady, and her groundstrokes were probing. Two close video rulings went against Li, and Sharapova retrieved one of the service breaks, only to hand it straight back. China's 2011 French Open champion closed out the opening set in 48 minutes.
Li, 30, missed a sitter of a forehand in a worrying sign at the beginning of the second set.
She held strong on her serve, however, and Sharapova stumbled in the fifth game. The fifth of Sharapova's six double faults handed Li another chance to break and when the Russian went long with a backhand, Li led 3-2.
She led 40-15 in the next game but Sharapova unloaded some ferocious winners to reach break point. Li recovered to move within sight of the finish line, breaking again for 5-2.
Li lost her first match point by hooking wide a forehand, but she then polished off the upset victory as Sharapova finished with a ruinous 32 unforced errors.
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