The world number five, making her first appearance in China since winning the French Open this year, dropped serve repeatedly as her slump in form continued.
Qualifier Niculescu romped away with the match after taking the first set, leaving Li, and the fans at the newly-opened National Tennis Center, stunned.
"I have just lost all confidence," a visibly shaken Li told reporters.
"On the court, I don't know what I can do. It was tough even winning one point. I asked my coach (husband Jiang Shan) to advise me. I know what he said was exactly right, but I couldn't do (it)."
Millions of Chinese television viewers enjoying a national holiday witnessed silence fall on the 15,000-seat stadium when Li failed to respond to the vocal support of spectators.
Asked by a Chinese reporter what message she had for them, the often outspoken Li replied: "Tell them to take care of their health."
"China is special. This is the biggest tournament in China. Of course I wanted to do well. But sometimes if I really want to do well, I put more pressure on myself. it's not only the pressure I give myself; it's also from outside," she said.
"Hopefully I can stand up again and prepare for next year," she added.
Niculescu described the match as the best of her career before the 24-year-old apologized to the millions of Chinese fans she must have upset.
"This time it was Li Na that lost and I'm sorry. I guess I played better. I won. I'm pretty sure her fans were happy when she won the French Open."
Former world number one Ana Ivanovic beat Japanese veteran Kimiko Date-Krumm for the loss of two games while Wimbledon semi-finalist Sabine Lisicki progressed when Romanian opponent Irina-Camelia Begu retired.
(Reporting by Peter Simpson; editing by John O'Brien and Clare Fallon)