Malaysia restricts US AI chips for Chinese data centers

Malaysia has implemented new restrictions on data center expansion and U.S. chip exports, creating significant barriers for Chinese companies seeking access to advanced AI semiconductors. The policy changes come as the Southeast Asian nation grapples with infrastructure constraints and mounting pressure from Washington to prevent Chinese firms from using the region as a backdoor to access restricted American-made AI chips.

What you should know: Malaysia has become a critical hub for Chinese data center operations, hosting the majority of Chinese-owned facilities outside mainland China.

• More than two-thirds of data center capacity under construction in Southeast Asia’s five main growth markets has been committed in Malaysia, according to DC Byte, a data center consultancy.
• Chinese tech giants including Tencent, Huawei, and Alibaba have invested heavily in Malaysian facilities alongside U.S. counterparts Microsoft, Amazon, and Google.
• The country announced in July that it now requires permits for all exports, trans-shipments, and transits of U.S.-made high-performance chips like those produced by Nvidia.

The big picture: China’s overseas data center expansion is part of what experts call an “AI Belt and Road,” launched after Beijing released a 2021 action plan calling for Chinese operators to expand abroad.

• The strategy gained momentum following Xi Jinping’s April visit to Malaysia, which resulted in a joint statement pledging cooperation on “data linkages,” 5G infrastructure, and AI development.
• Chinese firms have been rebranding their overseas operations to navigate increasing scrutiny—GDS Holdings, one of China’s largest data center operators, spun off its international subsidiary into an independent entity called DayOne in January.

Infrastructure constraints driving change: Malaysia’s data center boom is slowing as the country faces power grid capacity and water resource limitations.

• Johor state, Malaysia’s leading data center hub, introduced a vetting committee that rejected about 30% of applications as of late 2024 for failing to demonstrate sustainable water and energy usage practices.
• The state hosts 42 approved projects worth 164.45 billion ringgit ($39.08 billion) as of the second quarter of 2025, contributing 78.6% of Malaysia’s operational IT capacity.

Why this matters: The restrictions could significantly hamper China’s AI development efforts, as Chinese-made chip alternatives remain inferior to U.S. semiconductors for cutting-edge AI applications.

• “The U.S. 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 U.S. government sanctions policy adviser.
• Southeast Asia analyst Vivian Wong noted that increased scrutiny and tariffs “may potentially reap lesser success when compared to earlier years, especially in markets known to host Chinese-backed operations.”

Strategic implications: The policy changes reflect Malaysia’s delicate balancing act between maintaining strong economic ties with China while pursuing closer trade relations with the United States.

• Malaysia is China’s largest trading partner in Southeast Asia and a signatory to Beijing’s Belt and Road Initiative.
• However, the country is also working to finalize a trade deal with the United States, creating pressure to align with Washington’s chip export controls.