This followed President Rodrigo Duterte's directive to achieve a "soft landing" with the Philippines' much more powerful Asian neighbour.
The statement also outlined the issues Foreign Secretary Perfecto Yasay is set to discuss during the upcoming Asia-Europe summit (ASEM) on Friday and Saturday in Mongolia, EFE news reported.
Permanent Court of Arbitration in the Hague on Tuesday had denied China's claims over the South China Sea.
China said on Monday that the maritime dispute should not be included on the Asem agenda, with assistant foreign minister Kong Xuanyou insisting the meeting was "not an appropriate venue" to discuss the issue. China claims 90% of the South China Sea, and the U.S. backs every other nation's claims in the region to the extent they intersect with China's.
A similar zone set up in 2013 in the East China Sea riled Japan, the United States and its allies.
It also declared that China had acted unlawfully by violating the Philippines' sovereign rights within its exclusive economic zone - waters extending 200 nautical miles from the Filipino coast. Several countries have reclaimed islands in the sea to stake their territorial claims.
But the Chinese government and state media instead unleashed a tirade of vitriol against the tribunal, and vowed never to give up its claims to the sea.
"Malaysia cherishes peace and stability of the South China Sea and believes that China and all relevant parties can find constructive ways to develop healthy dialogues, negotiations and consultations while upholding the supremacy of the rule of law for the peace, safety and security for the region", the statement said.
"Beijing certainly should, and has to, ready itself for worst-case scenarios, including potential military collisions", it said.
The effort to calm the waters following the court ruling in The Hague on Tuesday suffered a setback when Taiwan dispatched a warship to the area, with President Tsai Ing-wen telling sailors that their mission was to defend Taiwan's maritime territory.
Mr Duterte has adopted a more conciliatory approach than his predecessor Benigno Aquino, saying the Philippines would be willing to share natural resources with China in contested areas if the tribunal ruled in its favour.
Democrat Ben Cardin of Maryland, a senior member of the Senate Foreign Relations Committee, said confrontation is less likely if the Philippines, Indonesia, Vietnam and other countries work with the United States rather than on their own.
In his first cabinet meeting since being sworn into office on June 30, Duterte said that he would not "taunt or flaunt" a favourable ruling and aim for a "soft landing".