Karlsson, who finished runner-up in Portugal last month, repeated his opening-round performance, enjoying a bogey free second round with six birdies on the way to a two-day total of 12-under 128 at the Hong Kong Golf Club.
'It is great to be in this position and I have played really well over the first two days,' Karlsson said. 'I have understood exactly what I need to do to have a good score around this golf course and then it is up to me to do it. So far I have done well. I used my driver only once today, at the sixth hole.'
Spaniard Miguel Angel Jimenez carded a 67 for the lone second spot in the $2.25 million event co-sanctioned by the Asian Tour and European Tour.
Canada's Mike Weir and Sweden's Jarmo Sandelin each had 64s to move into a group another shot back. Thailand's Thongchai Jaidee, a two-time Asian No. 1, had a 67 and was also at 133, along with American Bryan Saltus (65),
The 38-year-old Karlsson was at 3 under after nine holes and then shot to the top spot when he sunk three more birdies on the back nine that included a birdie on the final par-four 18th hole.
After dropping a shot on the sixth hole, former 2004 winner Jimenez bounced back on the way home when he fired four birdies.
'I always enjoy this golf course, it is a great old fashioned golf course where you have to be safe from the tee to allow you to have a chance for the green. You have to concentrate hard here and I like it,' he said.
Thongchai, with eight wins on the Asian Tour, shot a round that included four birdies against a lone bogey.
'The greens are really tricky but I'm enjoying myself out there,' he said. 'My plan is the same every day. The par-3s here are very tricky and the fifth, eighth and ninth holes are really tough. But I'm happy as I birdied the ninth, which I think is one of the toughest holes here.'
With six birdies against one dropped shot, Saltus, competing in his fourth year on the Asian Tour, said he enjoyed playing on his favorite course in Asia.
'This is an old golf course,' he said. 'I like old courses. You don't just smoke drivers on every hole, that gets boring. Here, you have to ply your way around, move the ball left to right, back and fourth, high and low and set it up.'
China's top golfer Liang Wen-chong improved with a 66 in tied 12th place alongside overnight leader K.J. Choi who slipped with a 72.
South African Retief Goosen was tied for 20th at 135 after a 66, while England's Nick Faldo had a 71 and was tied for 63rd.