Last year China denied reports it hacked into Pentagon computers
The United States' defence department says China is developing "disruptive" technologies for nuclear, space and cyber warfare.
These are shifting the military balance in Asia and have implications beyond the region, said the latest report by the Pentagon on China's armed forces.
It again criticised Beijing for a lack of transparency in reporting military spending and security policy.
The report also welcomed the rise of a peaceful, stable and prosperous China.
"However," it adds, "much uncertainty surrounds China's future course, particularly regarding how its expanding military power might be used."
China is successfully managing to expand its arsenal of sophisticated weaponry, even though China's ability to sustain military power at a distance remains limited, the Pentagon reported.
Chinese "armed forces continue to develop and field disruptive military technologies", including "nuclear, space, and cyber warfare".
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Some of these developments help China to participate in international peacekeeping, humanitarian and counter-piracy missions, it acknowledged.
But they could also allow China to "project power to ensure access to resources or enforce claims to disputed territories," the report said.
The Pentagon analysis said China is developing weapons that would disable its enemies' space technology such as satellites, boosting its electromagnetic warfare and cyber-warfare capabilities and continuing to modernise its nuclear arsenal.
It also said China had sold nearly $7bn (£4.8bn) worth of conventional arms in the global market, with Pakistan as the main customer.
The Pentagon noted China's construction of large naval base on Hainan Island "with direct access to vital international sea lanes". offering "the potential for stealthy deployment of submarines into the deep waters of the South China Sea".
Its report comes after a confrontation between US and Chinese ships in China's exclusive economic zone south of Hainan, during which China accused the US of spying.
China claims sovereignty over the Spratly and Paracel islands - claims challenged by a number of neighbouring countries.
The report estimated 2008 China's military spending was roughly double that of a decade ago.
Beijing usually criticises the Pentagon report, saying it unfairly portrays China as a military threat when it is committed to a "peaceful rise" as its economic power grows.