The Spaniard, who continues to be troubled by appendicitis, was out-run and out-played by his compatriot on his way to a 6-3 7-6 (8-6) defeat, only the third time Lopez has beaten the second seed.
Having dropped just three points on serve in the opening stages, Nadal was broken in the sixth as Lopez converted his second chance to push ahead.
He fired nine aces in the set as he won 80 per cent of points on serve, while continuing to pressure the Nadal serve.
Things looked to back under control at the start of the second as Nadal won the first three games, however Lopez sensed a chance of victory and broke back in the ninth.
In the following tie-break it was Lopez who prevailed, the world number 21 showing great athleticism to run down Nadal's returns before producing drop shots to win the point.
Nadal saw his only set point disappear as Lopez won the final three points to progress to the last 16 and a match with John Isner, the American serving 24 aces on the way to beating Steve Johnson 7-6 (8-6) 7-6 (9-7).
The world number two was not the only seed to bow out of the ATP 1000 event, though, with Stanislas Wawrinka, Kei Nishikori, Grigor Dimitrov and Milos Raonic all eliminated.
Gilles Simon came from a set down to beat Wawrinka 5-7 7-5 6-4, while Nishikori and Dimitrov were beaten in straight sets by Jack Sock and Julien Benneteau.
Raonic struggled in his match with Juan Monaco and, with the score 5-2 to the Argentine, the eighth seed retired with injury, putting his participation in the end of season finals in further doubt.
Top seed Novak Djokovic had no such problems as he brushed aside the challenge of Dominic Thiem 6-3 6-4 in 88 minutes.
The Serb won 76 per cent of his service points and converted two of his eight break points to record his 50th win of the season and extended his unbeaten run to 26 matches in China.
David Ferrer will also be in the next round after he came from a set down to beat Martin Klizan 4-6 7-6 (7-4) 6-4, the Spaniard saving five break points and crucially converting two to progress.
He will meet Andy Murray in the next round after the 11th seed comfortably beat Jerzy Janowicz 7-5 6-2, while Tomas Berdych recorded a 6-3 6-1 win over Richard Gasquet 6-3 6-1.
Third seed Roger Federer's place in the competition looked in doubt on numerous occasions during his clash with Leonardo Mayer, but he battled his way through after two hours 44 minutes.
The Swiss saved five match points before securing a 7-5 3-6 7-6 (9-7) victory to set up a match with Roberto Bautista Agut in the next round.
Meanwhile, Mikhail Youzhny beat Ivan Dodig 7-6 (9-7) 6-7 (4-7) 6-3 and Malek Jaziri will face Simon after a 6-0 6-4 win over Wang Chuhan.