Li, starting the day three shots behind, closed eagle-eagle to join overnight leader Dustin Johnson at 16-under. The rule declares that "players are expected to play in the spirit of the game by acting with integrity, showing consideration to others and taking good care of the course".
The two-shot violation prompted an outrage on social media, with European Tour chief executive Keith Pelley calling on R&A head Martin Slumbers to give referees more discretion on applying the new rules of golf that came into force on January 1.
Scrutiny centred on the well-imbursed superstar contingent lured to the event in Saudi Arabia, including world No 1 Justin Rose, Bryson DeChambeau, Dustin Johnson and Brooks Koepka, but the clique failed to catch fire in the arid conditions. On the 12th, he drained a long 30-footer putt to go four ahead at that stage.
"I respect the decision of my disqualification", he said.
Having reached the turn at six under par, Johnson's hot streak continued with a birdie on hole two, before a 15-foot putt for eagle from off the green on hole four propelled him to the top of the leaderboard.
"Those eagles, especially the last couple of shots, were really solid but except (for) that, honestly, my play, wasn't that good".
Li responded with a second birdie and then, on the back nine, hit a further three eagles, with three of his four coming on par-four holes as he surged into contention.
New Zealand's leading men's golfer Ryan Fox finished in a five-way tie for sixth on the latest stop of the European Tour in Saudi Arabia.
'The mistakes I made I felt were due to trying to chase the cut, and that doesn't happen if I get off to that - or putted a bit better the first day. Rose joins fellow Europeans Henrik Stenson, Thomas Bjorn and Lee Westwood in exiting the tournament. "I've done a great job of it in the past, and I don't feel like it is a factor when I'm making my schedule that I shouldn't be able to play well in this environment".