Malaysia tightens oversight of data centres amid AI chip controls

• Malaysia slows data centre boom under US pressure on AI chips.
• It’s caught between China and a US trade deal.

Malaysia, long a magnet for data centre investmentis slowing the pace of new projects. As Reuters reported, industry experts say the shift could complicate China’s attempts to secure powerful chips that are key to artificial intelligence development.

For years, cheap land, affordable electricity, and promising AI demand made Malaysia a natural choice for global cloud and data centre operators. US firms including Microsoft, Amazon, and Google built large facilities, while Chinese players Tencent, Huawei, and Alibaba also invested heavily. The southern state of Johor became the main hub, helped by its proximity to Singapore. With Singapore facing tight land and power limits, companies turned across the border to build new campuses, making Malaysia home to more than two-thirds of Southeast Asia’s data centre capacity now under construction, according to consultancy DC Byte.

But the rapid expansion is slowing. Malaysia is facing its own grid and water constraints, while also navigating geopolitical pressure from Washington. US officials have warned that Chinese-backed data centres in Southeast Asia could serve as a backdoor for acquiring restricted American technology, including high-performance chips used to train advanced AI systems.

In July, Malaysia introduced new permit requirements for all exports, trans-shipments, and transit of US-made AI chips such as those from Nvidia. The rule does not completely cut off access — chips can still be used within Malaysia — but it puts projects with Chinese investors under closer watch. Analysts say this reflects Kuala Lumpur’s need to strike a balance: maintain its role as a regional tech hub while preserving trade ties with both the US and China, its largest partner in Southeast Asia.

Chinese-made chips remain less capable than American onesmeaning Chinese firms depend on access to US hardware. That reliance is becoming harder to manage. “The risk is that these chips end up supporting military uses in China,” said Collmann Griffin, a lawyer at Miller & Chevalier and former US sanctions adviser.

China’s overseas data centre push began in 2021 when Beijing urged operators to expand in Belt and Road countries. Malaysia, a signatory to the initiative, became a focus. At the end of President Xi Jinping’s visit to Malaysia in April 2025, both governments pledged closer cooperation on “data linkages,” 5G, and AI. The statement underscored the political backing behind Chinese capacity growth in Malaysia.

Some of that growth has already taken shape. GDS Holdings, one of China’s biggest data centre operators, launched a hyperscale campus in Johor two years ago. But this year, GDS reduced its stake in the unit managing its overseas centres, spinning it off as a separate company called DayOne. The restructuring reflects the trade pressure Chinese firms face. “Rebranding is likely about diversifying their client base because they know very well what’s happening, the trade tension is moving,” said Lee Ting Han, Johor state’s vice chair for data centre development.

DayOne’s first project broke ground in Singapore in July. Its CEO, Jamie Khoo, said the company always intended to separate from its Chinese parent to operate more freely under different regulatory regimes.

Singapore itself had paused new data centre approvals between 2019 and 2022 due to energy and water limits. Last year, it cautiously reopened the door, allowing just 300 megawatts (MW) of new capacity “in the near term.” That has kept pressure on Johor, which offers cheaper land and power while still being close enough to connect to Singapore’s networks with low latency.

As of December 2024, Johor had 12 operational centres with nearly 370 MW of capacity. Another 28 projects in the pipeline could add almost 900 MW, according to Knight Frank. By mid-2025, the state had approved 42 projects worth about 164 billion ringgit ($39 billion), accounting for nearly 80% of Malaysia’s total capacity.

Yet Johor is no longer waving through every proposal. A vetting committee now reviews applications, focusing on sustainability. Nearly a third of submissions were rejected in 2024 for failing to show credible plans for power and water use. The state says approval rates have improved as developers adjust, but the stricter process signals a new phase: growth will continue, but not without checks on its environmental footprint.

Malaysia’s position remains complex. On one side, it benefits from China’s outbound investment and long-standing trade ties. On the other hand, it is negotiating a trade deal with the United States, which is wary of Chinese firms gaining indirect access to restricted technology.

“Malaysia has become an attractive market because of its location and relatively lower political friction compared with other countries,” said Vivian Wong, a senior analyst at DC Byte. “But as Southeast Asia faces increased scrutiny and tariffs, this may bring less success than in earlier years, especially in markets linked to Chinese-backed operations that are also targeted by the Trump administration.”

That pressure is unlikely to fade. With Washington watching closely and Beijing seeking ways to secure critical AI chip supplies, Malaysia will remain caught between two powers — and its data centre growth will be shaped as much by politics as by economics.

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