China May be Hit by Malaysia's Move to Slow Data Centre Growth

Malaysia is slowing the expansion of data centres amid concerns about the country’s power grid capacity and water resource constraints.

The Southeast Asian nation has been a popular location for data centres set up by US tech giants such as Microsoft, Amazon, Google and China’s Tencent, Huawei and Alibaba in recent years, spurred by cheap land and electricity costs and robust local AI demand prospects.

But its latest move could also have significant impacts on the regional heavyweight in the north. Industry insiders and analysts expect the data-centre slowdown eyed by Kuala Lumpur could hinder China’s efforts to gain access to powerful chips that are crucial to improving its artificial intelligence capabilities.

ALSO SEE: US Says Hidden Radios Found in Solar Highway Tech From China

More than two-thirds of data centre capacity under construction in Southeast Asia’s five main growth markets has been committed in Malaysia, according to data centre consultancy DC Byte.

Spillover from the more expensive Singapore, which is often described as a city-state, has driven companies to commit to more data centres in the neighbouring Malaysian state of Johor, partly because Thailand has had lingering political upheaval for close to two decades.

But the data centre boom has begun to slow as Malaysia grapples with power grid capacity and water resource constraints and pressure from Washington to not allow Chinese firms to use the region as a backdoor to access US-made AI chips that are under export controls.

Malaysia, China’s largest trading partner in Southeast Asia, announced in July that it would require permits for all exports, trans-shipments and transits of US-made high-performance chips, such as those made by Nvidia.

Chinese-made replacements for the US chips are still subpar alternatives for the sustainment and development of cutting-edge Chinese AI models and applications that can compete with their US rivals.

The new restrictions leave regulatory wriggle room for Chinese data centres to import US chips for in-country use.

However, scrutiny on these projects is bound to increase, experts say, as Malaysia tries to finalise a trade deal with the United States.

The US Commerce Department has raised concerns that data centres outside China could purchase AI chips to train AI models in China, including to support military uses, said Collmann Griffin, a lawyer at Miller & Chevalier who previously served as a US government sanctions policy adviser.

The US Commerce Department did not respond to a request for comment.

Chinese firms’ eagerness to purchase Nvidia chips has remained unaffected by the recent pushback from regulators in Beijing against their purchases. But so far, they have not ordered firms to cease purchases of Nvidia products.

Cooperation on ‘data linkages’

The overseas push by China began soon after it released a three-year action plan for Chinese data centre operators in 2021, calling on the firms to expand abroad, especially in countries signed onto Xi Jinping’s flagship overseas development Belt and Road Initiative, such as Malaysia.

At the end of Xi’s visit to Malaysia in April, the countries released a joint statement that pledged growing cooperation on “data linkages”, 5G infrastructure and AI, pointing to the growing political momentum underlying China’s data centre capacity expansion in Malaysia.

GDS Holdings, one of China’s largest data centre operators, began operating a hyperscale data centre campus in Johor two years ago, a massive project that is still being expanded.

But as the US continues to target China’s AI capabilities, GDS has gradually reduced its stake in the Singapore-headquartered subsidiary that managed its overseas data centres and spun it off into an independent entity called DayOne in January.

Lee Ting Han, Johor state’s data centre development coordination vice chair, said Chinese firms’ “rebranding” is likely to be aimed at diversifying their client base, “because they know very well what’s happening, the trade tension is moving.”

At the groundbreaking of DayOne’s first data centre in Singapore in July, CEO Jamie Khoo said that the company always intended to split its business from its Chinese parent as both companies operate under different regulatory regimes.

Singapore had a three-year moratorium of new data centre builds until January 2022 due to power and water constraints, before announcing last year that it would unlock just 300 megawatts (MW) of data centre capacity “in the near term”.

As of December 2024, Johor had 12 operational data centres with a combined estimated capacity of 369.9 MW and an additional 28 were planned for future development, representing an estimated capacity of 898.7 MW, according to a Knight Frank report.

Johor has emerged as Malaysia’s leading data centre investment hub with 42 projects worth 164.45 billion ringgit ($39.08 billion) approved as of the second quarter of 2025. They contribute 78.6% of the country’s operational IT capacity, the state’s chief minister said last month.