Regolith-hosted rare earth element (REE) deposits hosted by the granitic regolith in South China provide >90% of the world’s heavy REEs. Kaolinite is one of the major carriers of REE ions in regolith. The formation and transformation of kaolinite can be affected by chemical weathering and hydrodynamic conditions, but the contribution of each factor has not been evaluated. This study systematically investigated the variation in abundance of phyllosilicate minerals and structural order of kaolinite in the Renju regolith-hosted REE deposit. The total abundance of 1:1 phyllosilicate minerals increased upwards along the profile from Section I to Section III. However, semi-quantitative analyses indicated that Section III-1 (depth at 10–16 m) featured an evident decrease in both abundance and structural order of kaolinite upward along the profile. The morphological feature and abundance of kaolinite revealed intensive kaolinite-to-halloysite transformation and kaolinite dissolution in Section III-1. This suggests that the alternating wetting and drying zone in Section III-1 provided a favorable kinetic environment for the entry of water molecules into the kaolinite interlayer and the kaolinite-to-halloysite transformation, resulting in both lower structural order and abundance of kaolinite in Section III-1. Moreover, REE ions started to be enriched from the alternating wetting and drying zone and formed high-grade ores at the lower part of the water table, due to a significant increase in pore water and decrease in the seepage velocity. Therefore, the abundance and structural order of secondary kaolinite can serve as important indicators of hydrodynamic changes in regolith, as well as the mineralization of regolith-hosted REEs.