The Malaysian's conqueror at successive world championship finals in 2014-15, the rangy Chinese was majestic in the 21-18 21-18 title-decider, soaking up fierce pressure and smashing through Lee's defences at a heaving Riocentro.
In a career dominated by near-misses, Lee lost his third successive final after being beaten by Chinese great Lin for the gold in Beijing and London.
Lee battled to the finish, saving two match-points but surrendered on the third with a desperate smash that just sailed wide, triggering wild celebrations from red-clad Chinese fans in flag-draped terraces.
GB badminton duo Ellis and Langridge bag bronze after beating Chinese pair
An overwhelmed Chen, the bronze medallist at London, slumped to his knees then lay belly-down on the court where he grabbed China's second title of a mostly disappointing tournament for the Asian badminton superpower.
Rising to his feet he grabbed his rackets from his bag, walked around the arena and tossed them into roaring pockets of fans, before doing the same with his shirt.
Viktor Axelsen celebrated Denmark's second medal of the tournament by edging twice champion Lin 15-21 21-10 21-17 in the playoff for bronze, denying the Chinese great a medal in his final Games.
With Lee having beaten his nemesis Lin in the semi-finals, the championship match was meant to have been the four-times Olympian's crowning moment, when he finally grabbed the elusive major title missing in his career resume and ended his nation's 52-year wait for an Olympic gold.
He had come within two points of winning the gold in London, and at the Riocentro he also had his chances.
He held a 13-9 lead in the first set and was 8-5 in the second but was powerless to maintain the intensity against an opponent virtually impenetrable in defence.
With Chen's fans bellowing "China must win!", the Chinese grabbed four match points when Lee flicked an attempted drop-shot into the net.
Lee mounted a daring raid on the net to save one and clawed back to 20-18 when Chen smashed wide after a furious rally.
But he finally succumbed with the desperate overhead, leaving travelling Malaysian fans groaning and a nation frustrated that their wait for an Olympic champion goes on.
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