The report was published days after top US defense and foreign policy officials traveled to Asia as part of a bid to reassure traditional US allies concerned over Beijing's increasingly assertive actions in the South China Sea.
The Pentagon's 97-page assessment, published Tuesday, noted that China's official military budget had grown an average of 8.5% from 2007 to 2016, and that "Chinese leaders seem committed to increases in defense spending for the foreseeable future, even as China's economic growth slows."
Most analysts believe China has the second largest military budget in the world, ranking only behind the US.
The increased spending along with a number of recent military reforms is part of a "modernization" effort aimed at improving the Chinese military's "ability to fight short-duration, high-intensity regional conflicts at greater distances from the Chinese mainland," according to the report.
It also said that Beijing's first foreign military base, a naval port in the East African nation of Djibouti which sits in close proximity to a US base, is likely to be completed "within the next year."
"A more robust overseas logistics and basing infrastructure would also be essential to enable China to project and sustain military power at greater distances from China," the report said, adding that Chinese military leaders may seek to establish additional bases in places like Pakistan, where Beijing has "longstanding friendly relationship(s) and similar strategic interests."
While the report notes that China has not undertaken any new land reclamation projects on disputed features in the South China Sea during 2016, it did accuse China of further militarizing the contested Spratly Islands via the construction of 24 hangars capable of housing fighter aircraft, fixed weapons positions, barracks and communication facilities.
"Once all these facilities are complete, China will have the capacity to house up to three regiments of fighters in the Spratly Islands," the report said.
The report said the artificial islands have "enhanced China's ability to control disputed areas in the South China Sea and caused regional concern over China's long-term intentions."
China's claimed territorial waters, represented by the so-called "nine-dash-line," extends hundreds of miles to the south and east of China's Hainan Island. These claims are fiercely contested by many of China's neighbors, including the Philippines, Taiwan and Vietnam. In July, an international tribunal ruled that China did not have the right to resources within the waters.
China is also likely to continue its efforts to "assert its sovereignty claims over features in the East and South China Seas," according to the report, which added that Beijing was increasingly using its Coast Guard and maritime militia to assert its sovereignty.
"China has used coercive tactics, such as the use of law enforcement vessels and its maritime militia, to enforce maritime claims and advance its interests in ways that are calculated to fall below the threshold of provoking conflict," the report said.
The publication comes days after Secretary of State Rex Tillerson and Secretary of Defense Jim Mattis traveled to the region and lambasted China for its actions in the South China Sea.
"We oppose China's artificial island construction and their militarization of features in international waters," Tillerson said while appearing in Sydney, Australia Monday alongside Mattis and the Australian foreign and defense ministers.
"Artificial island construction and indisputable militarization of facilities on features in international waters undermine regional stability," Mattis told an audience at the Shangri-La Dialogue in Singapore, where he spent much of his time criticizing Beijing for its actions in the region.
"We cannot and will not accept unilateral coercive changes to the status quo," Mattis added.