The world number 11, who led overnight with Adam Scott of Australia, bogeyed his second hole but immediately turned on the style with one eagle and eight birdies to open up a five-shot lead at the Mission Hills Golf Club's Olazabal course with a two-day total of 16-under-par 128.
The two-day aggregate was four shots better than the previous 36-hole low at the HSBC Champions, the richest event in Asia, and one better than Tiger Woods' record in the WGC series.
Fellow South African Ernie Els, the reigning Open champion, matched Oosthuizen's sparkling round to move up to tied second place alongside Scott, who carded a 68 for a 133 total.
American Jason Dufner and Irishman Shane Lowry are equal fourth on 134 while four-time Major winner Phil Mickelson of the United States shot a 69 for joint sixth position with Dustin Johnson, seven back of the leader.
Asia's best placed golfer was Thailand's Prom Meesawat in tied 12th position on 137 alongside Europe's Ryder Cup stars Ian Poulter, Lee Westwood, Peter Hanson and Martin Kaymer, who is the defending champion.
Oosthuizen, the Open champion in 2010 and runner-up in the Masters Tournament in April, took full advantage of the five par five holes, shooting four birdies and one eagle. But he is not thinking of his third win of the season just yet after earlier triumphs in South Africa and Malaysia.
"I've just been playing really, really solid to shoot low numbers. I played the par fives really well, I think I was six under on them. And you know, just the rest was putting really well. I gave myself a lot of opportunities and if you make the putts, you shoot a low number.
"There's so many great players up there. Like I said, it's far from over. With this tournament, I'm in a great position to win it, but it's not even crossed my mind. There's still a lot of golf to be played, and I need to put myself in a great position going down the back nine on Sunday," said Oosthuizen, who needed only 24 putts for his round.
Els, nicknamed the "Big Easy" for his easy-going demeanor and languid golf swing, brilliantly turned in 29 with seven birdies and was nine under through 14 holes. The thought of shooting a 59 crossed his mind as he needed three more birdies in his last four holes but the birdies dried up.
"I wish I can always play like that," smiled Els. "That number (59) was crossing my mind. You know, I just didn't quite make the putts coming in."
In his first event back after an ankle injury sustained while playing tennis, Els was delighted to get back into the title hunt at the HSBC Champions. "I feel it, but it's all right. You know, what do say, be aware of the injured golfer," said the South African.
The dashing Scott stayed close to Oosthuizen with an outward 32 but stuttered on the back nine with three birdies against three bogeys. "I missed a few greens out there and misjudged the chips, tricky chips, but still, you know, I'm pretty happy with 68. It wasn't my best stuff out there, but moving in the right direction," said the Aussie.
"Five shots is a lot when you've got a guy like Louis out in front. He's a player who can get hot and shoot a low score like he did today [Friday]. If he does that over the weekend, he's going to make it really difficult for anyone to catch him."