The Argentinian's 6-2 6-4 triumph also sealed his berth at next month's Barclays ATP World Tour Finals in London.
"I'm so, so happy to be back in London for the Finals," said Del Potro. "Only eight players have the chance to be there and I'm one of them.
"The most important thing is the way I qualified. I've been playing really well. I'm so glad to show good tennis and I'm looking forward to closing a good year in London."
Fresh from winning the Japan Open, a red-hot Del Potro was quick out of the blocks, racing into a 4-0 lead with a scintilating display of flawless tennis at the Qi Zhong Tennis Center.
The 'Tower of Tandil' was producing a highlight reel of aggressive tennis thanks to some heavy groundstrokes from the back of the court and it wasn't until the fifth game that Nadal, the winner of 10 titles this year, managed to hold serve.
The 25-year-old Argentine wrapped up the opening set to love with a nerveless service game in 45 minutes.
Some more magical play in a marathon third game of the second set allowed del Potro to break his opponent before establishing a handsome 3-1 lead.
The Shanghai crowd were enjoying some quite breathtaking action at times as both players gave an exhibition of shot making.
At 5-4, the sixth seed held his nerve to serve out the match and secure his first win over Nadal since 2009.
It was only the second time this year that the French and US Open champion has failed to reach a final.
Earlier, defending champion and top seed Djokovic swept aside Jo-Wilfried Tsonga 6-2 7-5 in one hour 24 minutes to book his place in the final.
The Serbian raced through the first set against his seventh-seeded opponent and looked on course to make equally comfortable progress through the second when he moved into a 4-2 lead.
The Frenchman fought back to draw level, but, after seeing one match point in the final game go begging, Djokovic sealed his place in the final on the second.
"It's important for me to get into another final," Djokovic told the official ATP website. "[My serving] was very controlled, very efficient. I was trying to open up the court and move him around.
"I know he likes to have targets, he likes to play from the backhand corners so I tried not to [let] him into that comfort zone."