Malaysia Slows Data Centre Boom, Complicating China’s AI Chip Access

Malaysia, once the fastest-growing hub for data centre expansion in Southeast Asia, is now reining in the pace of growth — a move that could restrict China’s access to U.S.-made AI chips crucial for advanced model training.

Key Developments

• Dominant role: Malaysia accounts for two-thirds of all data centre capacity under construction in Southeast Asia, led by Johor near Singapore.

• Growth drivers: Lower costs and spillover from Singapore’s capacity constraints made Malaysia attractive to U.S. giants (Microsoft, Amazon, Google) and Chinese firms (Tencent, Huawei, Alibaba).

• New restrictions: In July, Malaysia required permits for all exports, trans-shipments and transits of U.S.-made high-performance chips like Nvidia’s, tightening regulatory control.

U.S. Pressure and Trade Tensions

• Washington fears Malaysia could serve as a backdoor for China to access restricted U.S. chips for AI and potential military applications.

• Malaysia is simultaneously seeking to finalize a trade deal with the U.S., which increases scrutiny of Chinese-linked data projects.

• The U.S. Commerce Department has warned that overseas-trained AI models could bolster China’s military edge.

China’s Overseas Push

• Under Xi Jinping’s “AI Belt and Road” strategy, Chinese operators were urged to expand abroad.

• GDS Holdings built a major campus in Johor but later spun off its international arm into DayOne, distancing from its Chinese parent amid U.S. pressure.

• Xi’s April visit to Malaysia ended with pledges of deeper ties in data linkages, 5G and AI infrastructure.

Johor’s Role

• By mid-2025, Johor had 12 operational data centres (369.9 MW) with 28 more planned (898.7 MW), worth $39B in investments.

• Johor introduced a vetting committee in 2024, rejecting ~30% of applications for unsustainable energy or water practices. Approval rates have since improved as firms adapt.

Risks for China

• Chinese AI chips still lag behind Nvidia’s in performance. While Malaysia leaves room for in-country use of U.S. chips, scrutiny is rising.

• Chinese firms are increasingly rebranding or restructuring overseas operations to avoid geopolitical pressure.

• Analysts warn Southeast Asia may become a less reliable outlet for China’s AI ambitions as U.S. tariffs and regulatory scrutiny intensify.