Regolith-hosted rare earth element (REE) deposits in South China have attracted widespread attention due to their crucial applications in technology and renewable energy solutions. However, the factors that control the formation of REE deposits in regolith remain poorly understood. Groundwater plays important roles in the physico-chemical environments of regolith. In particular, groundwater in the vadose and saturated zones, which are divided by the groundwater table, has distinct hydrological and physico-chemical properties and is likely to impose different effects on activation, migration, and enrichment of REEs in regolith. Our comprehensive geochemical and mineralogical investigations of the Renju REE deposits in South China suggest that the abrupt change of cerium (Ce) anomaly values, the occurrence of Fe-REE oxide colloids, and the prominent variation of goethite and hematite contents can be used as effective indicators for the groundwater table in the regolith. The distribution and geochemical behaviour of REEs reveal that the highly permeable vadose zone facilitates the downward migration of REEs liberated via dissolution of REE-bearing minerals by seepage water, whereas the relatively stable and high-pH saturated zone facilitates the adsorption of REE ions by kaolinite and halloysite. The long-term eluviation–illuviation processes led to the continuous accumulation of REEs in the saturated zone and, ultimately, the formation of lenticular-shaped REE ore bodies. The present study highlights the distinctive roles of groundwater in the vadose and saturated zones with regard to the activation, migration, and enrichment of REEs in the regolith of South China.