Nehwal lost to Yufei 18-21, 21-19, 21-10 in the second round match, which lasted over 60 minutes.
However, the 2012 Olympic bronze-medalist put up a tough fight.
Earlier in the day, Rio Olympic silver-medalist PV Sindhu stormed into the quarter-finals after dismantling Aya Ohori of Japan in a straight game win.
The 22-year-old Hyderabadi shuttler eased past her Hong Kong opponent Yuet Yee 21-18, 21-10 in the opening round of the tournament.
However, in men's singles event, shuttler HS Prannoy lost to Kazumasa Sakai of Japan in the second round.
Sakai defeated the World No. 10 Indian, 11-21, 21-10, 21-15 to enter the quarter-finals. (ANI)