The Scot matched Matsuyama's four-under round of 68 to reach 14 under par.
Daniel Berger is in third place, a shot behind Knox, with fellow American Bill Haas and Francesco Molinari of Italy another stroke adrift on 12 under.
Northern Ireland's Rory McIlroy is eight shots off the lead after an up and down 70 at Sheshan International.
The world number three was within four when he produced a brilliant recovery shot on the par-five eighth to set up his third birdie of the day, but bogeys followed at the 11th, 12th and 15th before he picked up strokes at the 16th and 18th.
Knox, bidding to become only the second player after former world number one Tiger Woods to retain a World Golf Championships title, was inches away from a hole-in-one on the fourth.
The 31-year-old was two behind Matsuyama when he picked up another shot on the 13th, only to find water with his approach to the par-five 14th as Matsuyama hit the green in two.
A two or three-shot swing looked certain and Matsuyama two-putted from long range for birdie, but Knox holed from 25 feet for an unlikely par and then birdied the 15th.
Knox was unable to make any more ground on the closing stretch and Matsuyama birdied the last as he looks to become the first Japanese player to win a WGC event.
England's Ross Fisher is in a tie for sixth place on 10 under, while the Republic of Ireland's Shane Lowry shot 65 to leap up the leaderboard and join McIlroy and Henrik Stenson of Sweden on nine under.
Race to Dubai leader Danny Willett endured another miserable day after a 75 left him 11 over par.
Defending champion Russell Knox remains three shots behind leader Hideki Matsuyama of Japan after three rounds at the WGC-HSBC Champions in Shanghai.