Dunn beat Selby 5-3 after consistently coming out the better in a scrappy match, and earned a semi-final spot against Ding Junhui.
Neil Robertson and Ali Carter will meet in the other semi-final, with Robertson having beaten Graeme Dott 5-3 and Carter having downed Ricky Walden 5-3.
42-year-old Dunn almost quit the game at the end of last season but decided to give it one more shot, and has gone past the last-16 stage of a ranking tournament for the first time in his 23-year professional career.
"Mark wasn't at his best but this season I have made sure that anyone who beats me has to scrape me off the table," said Dunn.
"That has made a big difference. This could have been my last season and I wanted to give it everything, so if I fell off the tour I wouldn't regret it.
"I didn't think I could out-score or out-safety Mark, but I've proved myself wrong. I kept thinking that I'd just done well to get this far and I've had my best ever season.
"I've been here in China for the last four weeks practising very hard. I'm looking forward to the challenge of playing Ding in his home country now. I just want to enjoy it."
Selby was dismayed at his inability to impose himself on the match, and will head to the World Championship later this month without a win under his belt this season - the first time since 2009 that he heads to the Crucible without a win under his belt.
"I just couldn't get any rhythm going. It was a stop-start match. There were a couple of big frames that Mike nicked," he said.
"I'll get a flight back to the UK as soon as possible, have some rest and then practise for the world."
Ding was delighted to earn his semi-final spot having earned a comfortable 5-2 win over Mark King.
"I've played Mark many times so we know each other's game well," said Ding.
"He had many chances and potted some great reds but didn't finished on a colour. It was very difficult to control the cue ball today and we both made positional mistakes.
"We both tried to concentrate and I think I played OK. I scored heavier when I got chances."
The Chinese star is not expecting an easy ride into the final despite Dunn's lowly world ranking of 73rd.
"I played Mike Dunn at the German Masters and I know he is a great tactical player. He didn't go back to UK after the Haikou World Open so he was well prepared to have a good run here. I will rest well and get prepared. I'm just one match away from the final."
Carter was happy to make it into the final four despite letting his concentration slip during the clash against Walden.
"I played well today in patches," said Carter. "I felt I had the game won at 3-1, then he came back to 3-3 and I felt I had let him back into it, so I had to dig in. I potted some good balls and had him in trouble in the last frame.
"The World Championship is just around the corner but this is a big event in Beijing and one I enjoy playing in. It's a chance this week to do well at the end of a tough season. I'm giving it my all. Neil will be tough to beat but it's just great to be in the semi-finals."
World number one Robertson was relieved to come through a tough match against Dott, after playing through illness throughout the week.
"I felt a lot better today and hopefully tomorrow I'll be even better," he said.
"If I get to the final I'll have to find the energy to play two sessions in one day. I lost a bit of concentration today towards the end but regained it in the last frame."
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- Neil Robertson
- Ali Carter
- Mike Dunn