中文
By Kat W. Wong
Lead: Malaysia's rare earth sector offers significant opportunities for Chinese companies seeking to strengthen critical mineral supply chains, but navigating the country's fragmented governance structure demands patience, local knowledge and sustained engagement.
Malaysia stands at a crossroads in the global rare earth supply chain, home to the only commercial-scale rare earth separation facility outside China and endowed with substantial mineral reserves. The Malaysian government's August 2025 ban on raw rare earth exports signaled a clear intent to drive domestic value addition and move up the global value chain. Yet despite these advantages and ambitions, Malaysia's rare earth sector is hamstrung by deep policy and structural gaps that undermine investor confidence and threaten the development of robust upstream and downstream industries.
At the heart of the challenge lies Malaysia's constitutional structure. The Federal Constitution grants the country's 13 states (excluding the three federal territories) primary control over land and mineral resources, while national policy and export regulations fall under the purview of federal authorities. This results in fragmented governance, inconsistent policy implementation and a lack of national coordination. Investors are forced to navigate a patchwork of state-level regulations and unpredictable approval processes, where federal ambitions frequently collide with state discretion. This disconnect has created a complex regulatory landscape that poses persistent uncertainty for major rare earth investments.
While the 13th Malaysia Plan rightly identifies critical minerals as a cornerstone for future growth alongside sectors like semiconductors and artificial intelligence, the policy framework supporting this ambition remains fractured. Unlike digital and manufacturing industries, which benefit from clear federal leadership, rare earth development is governed by an outdated mining regime that leaves states with autonomy over licensing, royalties and environmental standards. Federal agencies can advocate for rare earth development, but lack the constitutional authority to enforce harmonized standards or compel state cooperation.
For investors, this means that even projects aligned with federal priorities can be delayed, diluted or rejected at the state level, with no clear recourse or national framework for resolving disputes. The resulting regulatory risk is not occasional, but systemic. These risks are embedded within Malaysia's very governance model for mineral resources.
The experience of the Lynas Advanced Materials Plant in Kuantan is a case in point. As the only commercial‑scale rare earth separation facility outside China, it exemplifies Malaysia's strategic potential while exposing its policy vulnerabilities. Despite federal backing and its role in global supply chain diversification, the plant remains subject to local political dynamics, land use restrictions and environmental conditions determined by state authorities. This constitutional asymmetry leaves even Malaysia's most important strategic assets exposed to shifting local sentiments and regulatory interpretations.
The 2025 export ban was intended as a bold step toward strengthening Malaysia's position in the rare earth value chain. Still, it was not matched by the institutional reforms needed to realize this ambition. The absence of a dedicated critical minerals law, standardized federal-state revenue sharing, consistent environmental, social and governance (ESG) requirements and obligations for downstream processing leaves policy intentions unfulfilled. The continued reliance on the Mineral Development Act 1994, designed for conventional mining, further underscores the mismatch between existing regulatory tools and the unique challenges of rare earth development. Malaysia has since also issued the National Mineral Industry Transformation Plan 2021-2030 and the Mineral Industry sectoral plan under the New Industrial Master Plan 2030, launched in 2023.
This photo taken on March 13, 2025, shows a view of the Port Klang Free Zone in Klang, Selangor state, Malaysia. [Photo by Chong Voon Chung/Xinhua]
These overlapping plans and frameworks, none specific to critical minerals, each involving different agencies and levels of government, further complicate the policy landscape for businesses and investors by creating confusion over jurisdiction, roles and compliance requirements. The key question is: where should investors start?
The misalignment between federal and state priorities is the crux of the issue. State governments are naturally focused on immediate fiscal gains, local political dynamics and community sensitivities, especially given the lingering effects of anti-Lynas protests. In contrast, the federal government is driven by national growth targets, geopolitical considerations and the desire to integrate into trusted global supply chains. Without a binding mechanism to reconcile these diverging incentives, policy coherence remains elusive.
As global demand for rare earths accelerates, driven by electric vehicles, defense, artificial intelligence and clean energy, Malaysia should be poised to capitalize. Instead, the lack of jurisdictional coherence and policy certainty threatens to relegate the country to the margins, despite its geological advantages.
ESG standards further complicate the investment landscape. Rare earth extraction is fraught with concerns over radioactive waste, land degradation and social displacement. Yet ESG requirements in Malaysia are fragmented across states, inconsistently enforced and insufficiently integrated into licensing frameworks. For international investors subject to stringent sustainability standards, these gaps translate into significant reputational and compliance risks, often outweighing the appeal of Malaysia's resource base.
What Malaysia urgently needs is not another aspirational policy statement but a binding national critical minerals blueprint that directly addresses constitutional realities. Such a framework should clarify federal and state roles, establish nationally consistent ESG standards, require downstream processing commitments and create transparent mechanisms for investment approval and dispute resolution. Only then can Malaysia's rare earth ambition move from rhetoric to reality, unlocking the investor confidence needed to build resilient upstream and downstream sectors.
Malaysia's rare earth challenge is fundamentally one of governance, not geology. The country's future as a regional leader in critical minerals will depend not on what lies beneath its soil but on its ability to align constitutional structures with national strategic objectives. Without this realignment, Malaysia risks missing out on the transformative opportunities this sector can deliver.
Institutional and private investors should not be deterred by these challenges, as Malaysia's rare earth sector continues to present significant opportunities for those willing to navigate its complexities.
This photo taken on April 12, 2025, shows the cityscape of Kuala Lumpur, Malaysia. [Photo by Yao Dawei/Xinhua]
Unlocking this potential, however, demands a proactive and well-informed approach. Investors must devote time to comprehensively understanding Malaysia's intricate policy and legal frameworks, which requires in-depth research and ongoing monitoring of regulatory developments. Establishing robust relationships with both federal and state authorities is critical, as is engaging local stakeholders to build trust and ensure project alignment with community interests.
Furthermore, international investors should remain attuned to Malaysia's evolving political landscape and be sensitive to historical and current issues that shape local sentiments, especially surrounding rare earth projects. Strategic engagement, transparency and adaptability are essential to mitigate risks and foster long-term success. By approaching Malaysia with diligence, engagement and a willingness to address political sensitivities, investors can still play a pivotal role in shaping the future of its critical minerals sector and benefit from its geological advantages.
In navigating this evolving landscape, Chinese companies should keep in mind that Malaysia's governance dynamics are shaped by constitutional, political and societal realities that require careful attention.
While Malaysia can be an important partner in strengthening China's position in the global rare earth sector, engagement with Kuala Lumpur, and more so with individual Malaysian states, must be tactical, patient and grounded in a deep understanding of Malaysia's federal-state structure. Commitments secured at the federal level do not automatically translate into seamless operational rollout on the ground, where state authorities retain decisive power over land access, licensing conditions and community relations.
Australia's Lynas experience in Kuantan is instructive. The company did not achieve social acceptance overnight. It endured years of turbulence, public resistance and regulatory recalibration before learning how to operate in a manner that was locally sensitive and institutionally embedded. This process of trust-building, adaptation and sustained engagement offers a practical blueprint for any foreign investor seeking long-term positioning in Malaysia's rare earth ecosystem.
China's pursuit of deeper cooperation with Malaysia should also be contextualized within Malaysia's growing strategic engagements with other partners. The memorandum of understanding on critical minerals cooperation signed between Malaysia and the United States on Oct. 26, 2025, signals Kuala Lumpur's intention to work closely with Washington on exploration, extraction, processing, manufacturing, recycling and the development of secure and efficient critical mineral supply chains. Although this agreement does not exclude the participation of other countries, it does raise the bar for transparency, ESG alignment and institutional coherence. For China, the challenge is therefore not exclusion but alignment: matching the depth of understanding of Malaysia across federal agencies, state bureaucracies and regulatory institutions.
This task is made more complex by Malaysia's absence of a dedicated national rare earth authority. Without a single coordinating body, foreign partners must navigate a dispersed policy terrain spanning federal ministries, state governments, local regulators and community stakeholders. For China, as for all investors, success in Malaysia will depend on institutional fluency, long-term commitment and the ability to operate within Malaysia's unique constitutional and social fabric.
However, as Malaysia seeks to build its rare earth industry, Chinese firms' unmatched technological strengths in deep processing and their clear advantage in mining and processing equipment ensure they will remain primary partners for Malaysia's burgeoning rare earth industry. This sector will likely continue to offer opportunities for Chinese companies willing to navigate the governance hurdles and other complexities, thereby contributing to China-Malaysia economic and trade cooperation.
Kat W. Wong is the executive director of the Center for Advanced Studies and Research (CASR) in Malaysia.
