The idea that this is anything other than a pure fabrication sounds utterly implausible to me.

The claim of "most powerful and well-known female pirate leader in Chinese history" is simply wrong. We know of better known female pirates with much larger and more powerful fleets. "Most powerful and well-known currently operating in this area" is entirely reasonable.

The are many known examples of women being pirate leaders, bandit leaders, and rebel leaders in China, and some examples of female generals (there are more examples of women being military leaders in emergencies, without a long-term official position as general). These women are the top-level leadership tip of the iceberg, with many, many more women being lower ranking officers or soldiers, bandits, and rebels. In all of these roles, they were the unusual minority in male-dominated activities, but there were enough of them so that Lai Choi San is, IMO, quite plausible. I see no reason to dismiss her as a fabrication. Lilius exaggerates her fame, and almost certainly her Robin Hoodness. Her stated path to leadership - inheriting it from her father - was a known historical path to female military leadership (the other common one being inheriting leadership from a husband).

While there doesn't appear to be much evidence for her existence, she certainly could have existed.

It is possible that women pirate/bandit/rebel leaders are over-reported in Chinese history, meriting mention because they were women, while male leaders were common enough to not be mentioned. Sometimes, the focus in on scandalous behaviour - not all women military leaders were such exemplars of virtue as the legendary Hua Mulan who was noted for her filial piety, loyalty to the state, and chastity.

For a brief discussion of women bandits, generals, etc. in Chinese history, see Xiaolin Li, "Chinese women soldiers: A history of 5,000 years", Social Education 58(2), 67-71 (1994)