Malaysia is a rapidly growing and resource-rich country that has been industrializing since the late 1960s. Its industrialization has relied on the growth of labor-intensive industries, particularly the electronics and electrical-products industries, which have contributed significantly to the growth of the manufacturing sector. The growth and opening up of China has raised concerns about Malaysia's loss of competitiveness to China and the diversion of foreign direct investment to China. This paper examines the relative competitive position of Malaysia and China and explores Malaysia's responses and policy options, both international and national, to the challenges posed by China. The following policy recommendations for Malaysia are explored: working intensively with its partners in ASEAN to develop a common stand with regard to trade arrangements, forming bilateral free trade agreements with selected countries, restructuring Malaysia's manufacturing industries so they are far less dependent on labor-intensive industries, and improving the education and technological skills of Malaysia's labor force.