Neither player could quite find their range completely in the first set, with three breaks apiece seeing the opener head into a tiebreaker.
The breaker stayed true to the form of the match to that point, with Peng eventually getting the edge 9-7.
The 21st seed then took more control in the second set, breaking Shvedova twice on her way to taking the set 6-3 and with it the match.
Tenth seed Ekaterina Makarova made it five straight years in the fourth round of the Australian Open, as she beat Karolina Pliskova 6-4, 6-4.
Makarova needed just 68 minutes to see off Pilskova, with the Czech making too many errors to trouble Makarova.
Next on the agenda for Makarova is a clash with the in-form Julia Goerges who fought past Lucie Hradecka 7-6 (8-6), 7-5 in a tight encounter.
Fourteenth seed Sara Errani was not quite as lucky, succumbing to Yanina Wickmayer 4-6, 6-4, 6-3.
The result was something of a surprise, especially considering that Errani was a set and a break up at one point.