Yellen's four-day trip is her first as Treasury chief to China, with which the United States is butting heads over trade curbs, human rights and a litany of other disputes.
But Washington is working to dial down the temperature, and on Friday Yellen underscored to Li that the United States does not seek an economic showdown.
"We seek healthy economic competition that is not winner-take-all but that, with a fair set of rules, can benefit both countries over time," she told Li at Beijing's Great Hall of the People.
The United States has said it is seeking to "de-risk" from China by limiting the world's second-largest economy's access to advanced technology deemed crucial to Washington's national security.
Yellen underlined to Premier Li that while Washington would "in certain circumstances, need to pursue targeted actions to protect its national security", that should not derail ties.
"We may disagree in these instances," she said.
"We should not allow any disagreement to lead to misunderstandings that needlessly worsen our bilateral economic and financial relationship."
Highlighting the challenges, just days before Yellen's visit, Beijing unveiled new export controls on metals key to semiconductor manufacturing on national security grounds, in the latest salvo in the chips war.
The Treasury secretary Friday told American businesspeople Washington was "concerned" about the curbs.
She stressed during her visit that Washington was not seeking a "wholesale separation of our economies".
"A decoupling of the world's two largest economies would be destabilising for the global economy," Yellen told a meeting with representatives of US business at a session hosted by the American Chamber of Commerce in the capital.
- 'We can see a rainbow' -
Despite tensions, Beijing has struck an optimistic tone about the visit.
Premier Li told Yellen on Friday that China could see the relationship recovering after a difficult period.
"Yesterday, the moment you arrived at our airport and left the plane, we saw a rainbow," Li said.
"I think it can apply to the US-China relationship too... after experiencing a round of winds and rains, we surely can see a rainbow."
Analysts said Yellen's visit could allow for a warming of ties.
Chen Dingding, the president of the Guangzhou-based think tank Intellisia Institute, told AFP the visit could have "positive implications" for US-China relations.
"A small step towards better Sino-US relations would be a big step for the world and the world economy," said Lyu Xiang, an expert on the topic at the Chinese Academy of Social Sciences.
"The impact of this would be very significant."
On Saturday, Yellen is set to have a meeting and dinner with Chinese Vice Premier He Lifeng, a key official overseeing economic issues, said a Treasury official.
She will also have talks on sustainable finance and with women economists.
- 'We're talking'-
The United States does not expect specific policy breakthroughs this trip but hopes for frank and productive conversations that can pave the way for future talks, a Treasury official previously told reporters.
"Especially if they're things that we may disagree about, it's even more important that we're talking," they said.
Michael Hart, president of the American Chamber of Commerce in China -- who met with Yellen on Friday -- told AFP: "We're hoping that she would set the tone."
"The hope is that following her visit there would be more visits" both ways, he added.
Tensions soared earlier this year when the United States detected and then shot down what it said was a Chinese spy balloon after the craft traversed its territory.
Secretary of State Antony Blinken cancelled a visit to China over the incident but eventually travelled to the country in June.
During that trip, both sides agreed on the need to stabilise their relationship.
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