Malaysia’s data-centre clampdown seen as balancing act between U.S. pressure and China trade ties

Malaysia has moved to slow the expansion of its booming data-centre sector, introducing tighter rules and stricter oversight on infrastructure plans, a development that could complicate China’s access to high-performance AI chips just as global trade tensions intensify.

The Southeast Asian country has become a major hub for data-centre investment in part because of its relatively low land, power and labour costs — especially in Johor state, which has attracted numerous projects by Chinese and Western firms alike.

But earlier this week, Malaysia announced stricter permitting requirements for chip-related transactions, including exports, transshipments and transits of U.S.-made high-performance processors. Authorities have also begun rejecting applications for data-centre projects that don’t meet sustainability benchmarks for water, energy, or environmental impact.

Analysts say the shift is partly driven by rising U.S. pressure to ensure that sensitive AI hardware is not diverted into Chinese AI development, especially where export control measures apply. Malaysia’s move may limit opportunities for Chinese firms trying to rely on Southeast Asia as a de facto growth corridor into restricted technologies.

At the same time, the tightening reflects domestic concerns: Johor has been feeling strain on electricity supply and water resources, and government officials are facing rising scrutiny over infrastructure sustainability. Projects that once seemed inevitable are now subject to vetting by new committees.

China — for its part — has viewed Malaysia as an important partner in its Belt and Road Initiative, especially in “data linkages”, AI infrastructure, and other digital economy ties. But the new regulatory posture from Putrajaya signals a recalibration: balancing trade and investment cooperation with strategic risk, international scrutiny, and domestic resource constraints.

Observers believe Malaysia is seeking to assert greater sovereignty over its tech infrastructure decisions while also avoiding becoming a flashpoint between major powers.

Whether this move will slow China’s tech expansion in Southeast Asia measurably remains to be seen, but it sets a precedent for how other ASEAN countries might respond to similar pressures.