O'Sullivan edged a close opening frame and then doubled his lead with an emphatic break of 127. But Yuan pulled a frame back and threatened to pull things level, only for the Rocket to storm to victory with runs of 78 and 57.
Judd Trump also eased into the quarter-finals after thrashing Yan Bingtao 4-0.
The defending champion missed a routine red in the first frame but a stubborn Yan was unable to punish Trump, who went on to put together runs of 61, 56 and 70 to secure his second consecutive whitewash. He goes on to play either Kyren Wilson or Anthony Hamilton in the next round.
Trump is joined by Joe Perry in the quarters after the Englishman raced to a 4-1 victory over Robbie Williams, producing runs of 76, 77 and remarkably breaks of 62 and 70 in the same frame.
But local favourite Mark Allen crashed out in a 4-3 thriller to Alexander Ursenbacher. Ursenbacher took a two frame lead with breaks of 62 and 64 but Allen hit back with a century. Allen then levelled the match despite his opponent putting together a run of 53, but Ursenbacher took the lead once more with a break of 72.
Allen made sure of a decider with a break of 103, but Ursenbacher finished off the match with a run of 69 to send the Northern Ireland man home.
Trump flukes blue off SEVEN cushions
Elsewhere, Shaun Murphy battled into the quarter-finals with a 4-2 win against 2017 finalist Barry Hawkins in the pick of the last 32 clashes. Hawkins took the first frame with an impressive 77 break after a cagey start, but Murphy hit back, coming out on top in a tight second frame and putting together a run of 62.
And Murphy got the better of Hawkins by the skin of his teeth in the next two frames to make it 3-1, before Hawkins hit back with an impressive break of 129 to give himself a fighting chance.
But Murphy saw the match out and Hawkins failed to pot a ball in a one-sided sixth frame.