The World number six Indian lost 17-21, 11-21 against Xuerui in a 31-minute match at the Siri Fort complex.
Xuerui will next take on compatriot Liu Xin in an all-Chinese final in the women's singles category.
In men' singles, Chinese superstar Lin Dan beat fifth seed Thai Boonsak Ponsana 22-20, 21-10 in 39 minutes. He will lock horns with fellow Chinese Zhengming Wang, who pulled off an incredible 21-14, 19-21, 21-16 win over Sixth seed Japanese Kenichi Tago in a 57-minute match.
The 20-year-old Saina was not in her elements as a weak defense and a series of unforced errors ruined her final hopes although the semi-final finish still remains her best result in the Asian championship.
The Chinese shuttler was better prepared and exploited Saina's defense. The Indian tried to keep the shuttle low and served it flat but Xuerui used her agility and powerful smashes to shut the door on Saina.
The first game was a roller-coaster affair as the duo moved neck and neck from 8-8 to 16-16 but the Indian lost a couple of shots at the nets to allow the Chinese to surge ahead.
Another shot outside the court saw Xuerui going into the match point at 20-17 and the Chinese sealed the game comfortably.
In the second game, Saina couldn't match up to the fast paced game of the Chinese and her defense crumbled as from 3-3 the Chinese made it 8-3.
Saina couldn't retrieve the low drops of the Chinese pushed at her left. As Saina's game crumbled, the Chinese widened the gap to 12-4 and 19-6 and although Saina grabbed five straight points it was too little too late in the end.
Saina said she was not focused on the match and slow in the second game.
"I was not focused enough and was slow in the second game. We both are aggressive players but she was faster. I didn't know her as I am playing her for the first time. She was a better player today," she said.
"I'm still happy because it is my best finish in ABC and compared to last year, my game has improved but I will have to work more on my speed and how to slow down the game and also on the mental aspect of the game," she added.
In men's doubles, top seeds Hung Ling Chen and Yu Lang Lin of Chinese Taipei continued their march, beating the Korean pair of Sang Hoon Han and Ji Man Hwang 21-18, 12-21, 21-18 in a 53-minute match.
Fifth seeds Gun Woo Cho and Yeon Seong Yoo of Korea edged out sixth seeds Chieh Min Fang and Sheng Mu Lee of Chinese Taipei 21-18, 22-20 in a closely fought 33-minute match.
While in women's doubles, the sixth seeded Chinese pair of Pan Pan and Qing Tian beat third seeds Wen Hsing Cheng and Yu Chin Chien 22-24, 21-16, 21-18 of Chinese Taipei in more than an hour long match.
The Malaysian combo of Vivian Kah Mun Hoo and Khe Wei Woon beat fourth seeds Savitree Amitapai and Vacharaporn Munkit of Thailand 18-21, 21-17, 21-14 in another hard-fought women's doubles match.
The Chinese pair of Zihan Qiu and Qing Tian lost 22-24, 21-13, 11-21 to sixth seeded Korean combo of Yeon Seong Yoo and Min Jung Kim in mixed doubles.
Seventh seeds Peng Soon Chan and Liu Ying Goh of Malaysia beat fifth seeds Devin L F and Liliyana from Indonesia 12-21, 21-19, 21-15 in another mixed doubles match.
Lin Dan said he will try his best to win the title, which is missing from his cabinet.
"I am meeting my junior in the final tomorrow and I will give my best. Though I am happy that both the first and the second place belongs to China," Dan said.
Wang, meanwhile, said he had made a well-devised preparation against Tago and it paid off on Saturday.
"I had prepared well against him. He had beaten two chinese players in the All England Super Series and so had done some research on him and watched his videos," he said.
"He had 60-70 per cent of winning but he was not aware of my style of play as I had not played many internationals. In the end it was a close match but I won it," Wang said.
Asked how tough it would be to beat Dan in the finals, Wang said it is hard to say.
"I'm practising with the senior team for the last six months and I play against Lin Dan almost everyday but it is very hard to beat him," said the 2008 junior world champion.
Meanwhile, Xin, who takes on compatriot Xuerui, said her opponent Zhou Mi was not fit enough and she waited for the right opportunities.
"The second game was very close and the longer it stretched more I got impatient but I kept my cool and waited for the right opportunity," Xin said.
"I felt Zhou Mi was not at her best. She was not physically fit and she made a lot of mistakes," she added.
The 2007 Asian junior champion said her quarter-final match against Indian shuttler Aditi Mutatkar was more tough and considered Saina Nehwal as a tougher opponent than Zhou Mi.
Saina in Asian badminton semis
Saina Nehwal: Come what may, don't leave studies
Saina storms into semis of All England
Lin Dan sets up last eight clash with Peter Gade
Spotted: Saina Nehwal at Copenhagen