Li was born in Wuchang, Heilongjiang, China. She had no intention of becoming an Actress initially and she enrolled specifically in a high school for prospective school teachers. However, upon graduation, she discovered her interest in acting and was eventually persuaded by a friend to join the Shanghai Theatre Academy in 1993.

Li rose to fame after starring in Zhang Yuan's Seventeen Years (1999), which won her the Best Actress Award in the 1999 Singapore Film Festival. In 2001, Li starred in the television series Young Justice Bao, which propelled her to become one of the most famous actresses in China.

Li's first-time in an English-language film is Wayne Wang's Snow Flower and the Secret Fan, adapted from Lisa See's 2005 novel of the same title. The film premiered at the 2011 Cannes Film Festival. Li started to gain recognition in Hollywood after starring in Resident Evil: Retribution, playing Ada Wong. The same year, she was cast in action fantasy film 400 Boys, directed by British Director Alastair Paton.

In 2006, Li starred in romance film The Knot, directed by Yin Li. The film was China's entry for the Best Foreign Film award at the 2008 Academy Awards. Li won Best Actress awards at the 2007 Huabiao Awards and at the 2008 Hundred Flowers Awards. In 2008, she co-starred with Jet Li and Jackie Chan in the 2008 blockbuster The Forbidden Kingdom as the White-Haired Witch. The film was her first appearance in an international film, and gave her a solid international following.

In 2009, Li won Best Actress at the 46th Golden Horse Film Awards for her performance in The Message, about Japanese invaders in China who try to ferret out a spy among their Chinese collaborators.

Li then starred in Tsui Hark's 2010 action-mystery film Detective Dee and the Mystery of the Phantom Flame. She played Shangguan Jing'er, a fictional character based off Shangguan Wan'er, a prestigious Politician during the Tang Dynasty. She established her studio in the same year, co-starring and co-producing the film 1911 with Jackie Chan, which was released in September 2011 to celebrate the 100th anniversary of the Xinhai Revolution.

Li has also starred in Hollywood blockbusters Resident Evil: Retribution (2012) and Transformers: Age of Extinction (2014).

On July 24, 2013, it was reported that Li has a godfather named Wang Lin, a qigong practitioner who claims to be able to conjure up snakes from thin air, cure disease, and retrieve an incinerated banknote intact from an orange. The Beijing News reported that Li Xue, Li's agent, responded that Li went to visit Wang Lin to ask him to cure her mother of her disease. As for the effectiveness of the cure, the agent refused to disclose any more information.

In 2015, she was cast in 3D science fiction thriller Nest (also known as Guardians of the Tomb), a Chinese-Australian co-production that was finally released in January 2018. The same year, it was announced that Li would play China's first female superhero in upcoming film Realm, written by Stan Lee.

In 2016, Li joined the cast of Meg, an American shark film based on Steve Alten’s 1997 novel.