The American star made her earliest exit in Melbourne since 2006 with a stunning 6-4, 6-7(2), 7-5 defeat to 27th seed Wang on the Rod Laver Arena court.
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Williams, a seven-time Australian Open champion, lost before the fourth round at the tournament for just the fourth time in her illustrious career. Her wait for a record-tying 24th major singles title goes on.
The eighth-seeded Williams committed 56 unforced errors as she slumped to an early exit.
“I just made far too many errors to be a professional athlete today,” Williams told a news conference.
Wang, meanwhile, was impressive throughout, settling early and rebounding in the third set to close out victory in two hours, 41 minutes.
Wang — crushed 6-1, 6-0 when the pair met at the U.S. Open last year — quickly settled despite Williams’ pressure and saved three break points during a lengthy sixth game.
Williams looked the more likely to find a break before Wang did just that with a forehand winner to take a 5-4 lead.
A long backhand return saw Wang serve out the opening set to 15, stunning Williams.
Williams fell into a 0-40 hole in the fifth game of the second set and Wang delivered a forehand winner to take a 3-2 lead.
Struggling to find her range, Williams saved a break point in the seventh game before squandering one in the eighth.
But Williams stepped up when Wang served for the match, breaking back to 15 with a ripping forehand cross-court winner.
Williams fought back from 15-40 down in the following game before delivering in what was a tense tie-break to force a deciding set.
Wang stayed with Williams despite the second-set disappointment as they held serve, the former squandering two match points with nervous errors in the 12th game.
But she took her third chance when Williams sent a backhand into the net to fall to a stunning defeat.
The 38-year-old Williams said losses were still painful, but she was better at hiding her disappointment.
“I am just a better actress, as I always say now. I’m no happier than I was 10 years ago,” Williams said. “But I just have to pretend like I don’t want to punch the wall, but in reality I do.”
STATISTICAL BREAKDOWN
Wang Qiang [27] bt Serena Williams [8] 6-4 6-7 (2-7) 7-5
WINNERS/UNFORCED ERRORS Wang – 25/20 Williams – 43/56
ACES/DOUBLE FAULTS Wang – 2/1 Williams – 8/4
BREAK POINTS WON Wang – 3/12 Williams – 1/6
FIRST SERVE PERCENTAGE Wang – 63 Williams – 56
PERCENTAGE OF POINTS WON ON FIRST/SECOND SERVE Wang – 69/60 Williams – 70/50
TOTAL POINTS Wang – 121 Williams – 111