So this is more an issue of the way Chinese handles past and present tense. Chinese doesn't really have verb tense so whether something is past, present, or future is usually determined by auxiliary words in the sentence.
In this case, Song Li doesn't add any of those to her statement. In Chinese you wouldn't immediately know whether it's past or present making it a mystery. Unfortunately, in English, all verbs have a past and present tense so I have to pick one.
Interesting . . .
As far as the translation goes, using the present tense is probably the only reasonable option if the context doesn't present you with more information - it's not exactly great, but it's kind of workable if you can make the distinction between the subject being a common noun rather than a proper noun slightly indistinct . . . It's hard when the subject is "a sister" - that's really too distinctly individual, though depending on the source language it may be possible to phrase it more like "my parents have two daughters", which still reads a bit wrong when one of the daughters is dead, but it's somewhat better. Except that it's kind of a weird construction, unless the subsequent discussion is going to be framed around the parents rather than the siblings, and it feels kind of awkward even then . . . Languages are hard, translation is even harder, so you're kind of stuck with finagling the least-bad option sometimes . . .
The saving throw here, though, is that when you're talking about someone who's been a really big part of your life, and who's
still a really big part of your life even if they're dead, it's not weird at all to keep using the present tense automatically. Often you'll see that in a construction like "I have a sister . . . sorry,
had a sister", with the internal sense that the sister is still there driving the comment, but then the recollection that as far as the rest of the world is concerned it's a past tense thing triggers the correction. In this context the the potential correction segues into the flashback . . . except the author cuts that off before reaching any kind of firm conclusion. To my mind that means the author is
intentionally leaving things ambiguous, and the most natural way to encompass that in English in this context would be to use the present tense and then rely on the ambiguity left by the inconclusive flashback to convey the ambiguity about Song Xue being alive or dead that's there in the original.
The only other thing I'd add is that this only really works if the person referred to was a really big important part of your life, and you're still invested in them sufficiently that your first thought about them isn't "they're dead" - so it implies a bunch of stuff about Song Li's relationship and feelings about her sister, which may or may not be in the original . . . But it's clearly not much of a stretch in this case, so not a problem unless there's lots of other context suggesting otherwise.
Long story short, good choice of words, mystery intact, keep up the good work!