He sold the 10-day-old baby to a couple in another province for 4,000 yuan (£4,500) in late September. His mother reported him to the police after realising that her granddaughter had gone missing.
Li, 42, told police that she was going to stay at her son's house to help take care of the newborn girl, like she did when her first granddaughter was born.
However, much to her surprise, her son Xiaohui refused, Yiwu police said in a statement.
'I only saw my granddaughter a couple of times when she was born. I never saw her after that - my son wouldn't even let me in the house,' she said, adding that she could only leave her homemade meals at their doorstep.
In early October, Li finally visited her daughter-in-law when her son was not home, but the baby was nowhere to be found.
She immediately questioned her son about the baby's whereabouts but he refused to answer her. Furious, she reported him to the authorities after suspecting him of selling the child.
After being interrogated by police, Xiaohui admitted to selling his daughter to a couple in Hubei province's Enshi city, more than 1,200 kilometres (745 miles) away.
The man said he wanted to sell the baby girl because he had hoped for a son instead. Being unemployed, he felt under financial pressure having already had a daughter.
On October 15, Yiwu city police finally located the couple in Enshi and rescued the baby girl.
'We were worried that the buyers could be involved in a child trafficking scheme,' officer Zhu Xiaojing said. The married couple, surnamed Zhang and Xu, were desperate for a child after trying and failing for more than 10 years.
Police added that the couple admitted to buying the baby online and were cooperative during investigations.
Both the couple and the father were detained by police, according to the statement. The baby has been transported back to Yiwu and is currently under the care of her mother and grandmother.
Under Chinese law, trafficking and selling women and children is punishable by five to 10 years in prison, but life sentences or death penalties can also be issued.
The incident saw the cruel father widely criticised on Chinese micro-blogging site Weibo.
'What a brute! He should be jailed under the child trafficking law!' user Chenhaonan said.
'Kudos to the grandmother for reporting her son to the police,' Quanshi_shuaige said. 'She must be devastated to have a son like that.'
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