The US has expressed concern over China's growing military might.
Levels of trust between the US and China are currently not very high
A Pentagon report given to Congress says Beijing is spending far more on its military budget than admitted and calls for greater transparency.
The report highlights China's greater ability to mount pre-emptive strikes, citing new submarines, unmanned combat aircraft and sophisticated missiles.
China said in March it was increasing its military spending by 17.8% in 2007 but it still lags far behind the US.
The BBC's James Coomarasamy in Washington says the Pentagon paints a picture of a country whose growing economic and political power is being mirrored in "a comprehensive military transformation".
The annual report says Beijing is moving towards a more pre-emptive defence strategy with the focus on its border areas.
It suggests that the possibility of US intervention in any crisis in the Taiwan Strait is an important factor in China's military planning.
The report also describes a successful anti-satellite weapon test conducted by the Chinese in January as posing a threat to "all space-faring nations".
As in previous reports, there was strong complaint about a lack of transparency in both China's military spending and its military aims.
"It would be nice to hear first-hand from the Chinese... we wish there were greater transparency, that they would talk more about what their intentions are," US Defence Secretary Robert Gates said on Thursday, prior to the report's release.
Its publication comes at the end of a week when a high level Chinese delegation has been in Washington discussing areas of economic tension - and is a further sign that the levels of trust between Washington and Beijing are currently not very high, our correspondent says.
The Pentagon report highlights concerns about China's preparations to deploy a mobile, land-based ballistic missile, with a range that reportedly covers the entire United States.
The development of a new fleet of nuclear-powered submarines, equipped with ballistic missiles with a range of more than 8,000km (5,000 miles), is also cited.
China is adding a new class of nuclear submarine to existing stock
Experts say the Jin-class vessels are capable of carrying 12 missiles, with each one armed with three nuclear warheads.
One of these Chinese-built submarines is currently undergoing tests, and five more are planned, says Andrew Yang of the Chinese Council for Advanced Policy Studies in Taiwan.
Previously China had just one nuclear-powered submarine, which was so unreliable it rarely travelled far from its base, Mr Yang said.
He added: "The Americans are concerned about whether a gradual build-up of nuclear forces implies China will change its nuclear policy of no first use."
Over the last 15 years, China has been engaged in a massive military build-up and modernisation programme.
It plans to allocate 350.9bn yuan ($45.9bn) to its military this year, although some analysts say Beijing spends double or triple this amount.
However, the BBC's defence correspondent Rob Watson says US opinion is divided over the strategic challenge posed by China.
Some see it as an emerging threat that must be countered at every turn - others take a more benign view, seeing China's increased military expenditure as a natural consequence of its growing economic power, our correspondent says.