The Defense Department says China shows growing capability to project military power beyond its shores.

In an annual report to Congress, the Pentagon said Thursday that China is developing and testing new types of missiles, expanding the reach of its navy and upgrading its air force.

The report says China's military modernization is primarily driven by potential conflict in the Taiwan Strait, but also by increased tensions in the East China and South China seas. In November, China conducted its largest naval exercise to date in the Philippine Sea.

China is engaged in territorial disputes with several of its neighbors, including U.S. allies Japan and the Philippines. China is currently locked in a tense, offshore standoff with the Vietnam.