The victory enabled the Indians avenge a 0-1 defeat to the Chinese in the pool stage of the tournament.
Japan stunned defending champions Korea 2-1 in the final to win the tournament and secure a place in next year's World Cup at The Hague, the Netherlands.
India, who needed to win the tournament to qualify for the World Cup , dominated proceedings in the first half and scored twice from field goals, through Anuradha Devi Thokchom (16th minute) and Vandana Katariya (31st) to go into the breather with a comfortable 2-0 lead.
China pulled one back in the 51st minute through Yan Yan's field goal and then some sloppy defending towards the end allowed Wu Mengrong find the equaliser in the 64th minute.
Thereafter, both the teams played cautiously in the last six minutes to take the match into the shoot-out, where the Indians came out on top, converting three of their chances as against two by the Chinese.
Image: Members of the Indian women's hockey team
Photograph: Hockey India
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