Italian Molinari produced a masterclass in iron play as he shot a bogey-free seven-under-par round of 65 at Sheshan to lead from Westwood.
Molinari began on the back nine and carded consecutive birdies at the 13th and 14th before picking up another shot at the short par-4 16th to turn in 33.
But the highlight of the 28-year-old's round came in a run of four successive birdies from the third.
He hit a string of approach shots close, highlighted by his tee shot at the par-3 sixth which was struck straight at the flag, before he converted a difficult eight-foot downhill putt.
Westwood ended Tiger Woods' five-year reign at the top of the Official World Golf Ranking without hitting a ball on Monday as he recovered from a calf injury. And there were no signs of rust from the Englishman on his first appearance since the Alfred Dunhill Links Championship as he carded a six under 66.
Like Molinari, Westwood started on the back nine and posted three birdies on the way out.
He then birdied the first and sixth but dropped his first shot of the day at the seventh.
But he responded in brilliant fashion by birdieing his last two holes.
There was more good news for the European contingent as Sweden's Henrik Stenson shot a five-under 67 for a share of third, alongside Korea's Noh Seung-yul and Japan's Yuta Ikeda.
Woods, who lost the No.1 ranking for the first time in more than five years, kept pace with a 68. Woods opened with bogey, made a stunning save on the 15th with a 4-iron out of a cluster of bushes, then made three straight birdies early on the back nine.
USPGA champion Martin Kaymer had a 72, while defending champion Phil Mickelson shot a 69, the same as Scotland's Richie Ramsay.