Zhao's drama about transient Americans roaming the West in vans was tipped to be one of the top winners overall on a night when Tinseltown A-listers reunited for the first time in more than a year.
"What a crazy, once-in-a-lifetime journey we went on together," said Zhao to her crew and cast, including the real-life "nomads" who played fictionalized versions of themselves in the movie and were in attendance in Los Angeles.
The unorthodox Oscars ceremony - which was moved from a Hollywood theater to a glammed-up downtown train station to abide by strict Covid-19 protocols - began with a movie-style opening credits sequence, as actor-director Regina King strode into the venue clutching a gold statuette.
"Live TV, here we go. Welcome to the 93rd Oscars!" said King.
"And, yes, we are doing it maskless... people have been vaxxed, tested, re-tested, socially distanced," she added, comparing the show to a movie set.
Beijing-born Zhao's best director win makes her the first woman of colour ever honored in the category, and the second female after Kathryn Bigelow, who broke the glass ceiling in 2010 when she won the prize for The Hurt Locker.
With movie theaters closed all year, and blockbuster content delayed, Zhao's film captured the pandemic zeitgeist with its stunning portrait of the isolated margins of society, and has swept most of the awards shows in the run-up to the Oscars.
Zhao, who has drawn controversy in China after years-old interviews resurfaced in which she appeared to criticize her country of birth, quoted classic Chinese poetry in her acceptance speech.
The directing award was presented by last year's winner Bong Joon-ho, whose South Korean movie Parasite became the first film not in the English language to win best picture. He spoke from Seoul via videolink in Korean, with a translator, finishing with a few words in English.
But Nomadland lost out early in the gala for best adapted screenplay to The Father, adapted from his own stage production by French playwright Florian Zeller, who added to the international flavour by accepting from Paris.
Promising Young Woman, a potential rival for best picture - won best original screenplay, the night's first award.
Emerald Fennell, who was seven months pregnant when she shot the #MeToo revenge thriller, thanked her son who "did not arrive until a couple of weeks after shooting, thank God, because I was crossing my legs."
Fellow Brit Daniel Kaluuya won best supporting actor for his portrayal of slain 1960s Black Panther leader Fred Hampton in Judas and the Black Messiah.
References to racism and police violence were threaded throughout the show's speeches, starting with King's opening comments, in which she mentioned the conviction of a former police officer for the murder of African American man George Floyd.
"If things had gone differently this past week in Minneapolis, I may have traded in my heels for marching boots," she said.
Oscars 2021 ceremony was moved from a Hollywood theatre to a glammed up Union Station, to abide by Covid-19 safety protocols. (Image: Reuters)
Heart and soul
More than halfway through the night, both acting prizes had gone to performers of colour, and in the end, all four could go to non-white nominees, after years of #OscarsSoWhite complaints.
South Korea's Youn Yuh-jung (Minari) won supporting actress honours, as was expected.
"How can I win over Glenn Close?" she said, acknowledging her fellow nominee, who has eight nominations but no wins in her career.
But the last races promise to be close-run affairs, in particular best actress.
All five contenders including Nomadland star Frances McDormand, Viola Davis (Ma Rainey's Black Bottom) and Carey Mulligan (Promising Young Woman) have won awards for their work.
Soul became Pixar's latest Oscar winner for best animated feature, while South African aquatic wildlife feature My Octopus Teacher won best documentary.
Oscar-nominated actor Riz Ahmed.
In the flesh
This year's 93rd Oscars arrived at their Union Station venue two months late due to the pandemic - organizers have said it would have been "impossible" without the delay.
Before the show, stars paused briefly for pictures and socially distanced interviews on what organizers called a "teeny-tiny red carpet," where actresses Carey Mulligan and Andra Day dazzled fashion fans in Oscars gold.
The pre-show featured a performance of best song nominee "Husavik" from the tiny Icelandic port of the same name, complete with a choir of children singing in woolly sweaters and a backdrop of fishing boats. Other musical performances came from the Academy's new film museum.
An honorary award for the Motion Picture and Television Fund, which has supported struggling actors and crew particularly during the pandemic, was awarded at the Oscars' traditional Hollywood theater base.
But the bulk of the awards were handed out at the 1930s-built Union Station, chosen for its grand scale and outdoor courtyards, where white tents sheltering everything from Covid testing booths to catering were installed.
"We're here, isn't it crazy?" said best actor nominee and Sound of Metal star Riz Ahmed. "Human beings in the flesh!"
By Andrew MARSZAL © Agence France-Presse