Despite struggling for peak form, the world No. 1 managed to eke out a 6-4 lead on Saturday only for Zhang to reel off the final five frames in securing a best-of-19 frame final clash with Tom Ford on Sunday.
As well collecting the trophy and £175,000 first prize in Tianjin on Sunday night, the final spot in the 16-player Champion of Champions will go Zhang or Ford with the winner of the International Championship facing O’Sullivan in Group 3 of the Champions of Champions in Bolton on Wednesday afternoon.
“He played well and deserved to win. He was the better player on the day, so fair play to him,” said seven-time world champion O’Sullivan.
“I expected him to be like that as I’ve played him a few times, he was solid. He is a fantastic player, I don’t know where he has been for the last ten years.”
O’Sullivan’s defeat was also bad news for Six Red world champion Ding Junhui, who needed O’Sullivan to win the tournament to keep alive his hopes of qualifying for the Champion of Champions.
A place at the Champion of Champions is worth £12,500 to a first-round loser with the champion picking up £150,000 at the University of Bolton Stadium on Sunday 19 November.
Ding joins two-time winner Neil Robertson and 2018 finalist Kyren Wilson in failing to qualify for this year’s event with O’Sullivan chasing a fifth victtory after a 10-6 win against coming Masters holder Judd Trump last year.
Higgins and Chris Wakelin meet in the other Group 1 semi-final on Wednesday, while UK champion Mark Allen faces World Seniors champion Jimmy White in the tournament opener in Group 4 on Monday afternoon.