Venus, the double Olympic champion, was beaten 7-5 7-5 by the Chinese.
Venus raced into a 3-0 lead in the opening set but Li, the first Chinese player to reach the top 20 in the world rankings, proved she had the stomach for a fight.
After regaining parity, she seized the moment to break the Williams serve at 5-5 and served out the set in style.
Williams, who won gold in doubles and singles in Sydney eight years ago, founds herself 3-0 down in the second set as the decibel level reached new heights.
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