Karlsson, 38, had two bogey-free rounds before the par-4 ninth and finished with a 4-under 66 at the Hong Kong Golf Club in Fanling.
Karlsson had four birdies on the front nine and one more at the 14th, for a 16-under-par 194 total in the tournament.
Four strokes behind was Spain's Miguel Angel Jimenez, the 2004 champion who also shot a 66 after bogeying the ninth.
'I am very happy with the way I played today and that is the most important thing,' Karlsson said. 'Both me and Miguel had a fantastic start and if you play well the first few holes, you get into the rhythm of the round and we made the most of it.'
Marcus Fraser of Australia shot a blemish-free 64 to tie him for third with first-round leader K.J. Choi of South Korea, Peter Hanson of Sweden and Shiv Kapur of India, all at 11 under for the tournament.
'I've putted better today as I have been struggling with my putting the last couple of weeks,' Kapur said.
Canadian star and former U.S. Masters champion Mike Weir shot a 3-under 67 to slip into a tie for seventh in the event co-sanctioned by the Asian Tour and European Tour.
Thailand's Thongchai Jaidee shot a 68 and is tied for 10th seven strokes behind the leader. Liang Wen-chong (68) of China, who leads the Asian Order of Merit, is tied for 14th.