The U.S.-China Economic and Security Review Commission said China's military modernization is altering the balance of power in the Asia-Pacific region and challenging decades of U.S. pre-eminence.
The commission advises Congress on the national security implications of the relationship between the two world powers.
The groups' annual report also examined cyberintrusions from China, the trade and economic relationship with the U.S., and China's global ties.
The primary recommendation is that Congress fund shipbuilding and increase the Navy's operational presence region in support of the Defense Department's goal to base 60 percent of its warships in the Asia-Pacific region by 2020, compared with about 50 percent currently.
That's a priority of the Obama administration's diplomatic and military rebalance to Asia after a decade of war in Afghanistan and Iraq.
The commission said it welcomes the policy, but added: "There is growing concern among U.S. allies and partners that the Department of Defense will be unable to follow through on its commitment to the rebalance due to declining defense budget and continuing security challenges elsewhere."
The panel also recommended that the U.S. improve air and maritime capabilities of allies in the region.
Last year, the Chinese Foreign Ministry accused the commission of "indulging in Cold War mentality." Beijing said it has no offensive intent, and accused Washington of trying to contain it.
The U.S. far outstrips China in military spending, but in Asia faces a greater burden in fielding forces far from its own shores.
Rep. Howard "Buck" McKeon, chairman of the House Armed Services Committee, voiced concern that at a time when the U.S. military faces budget cuts, China's military spending is increasing and its leaders want to increase combat readiness.
"Its current pace of military modernization shows that Beijing is developing the ability to project power and influence further abroad," McKeon, R-Calif., told a committee hearing Wednesday.
Rep. Adam Smith, D-Wash., said that while the U.S. should monitor military developments in China, an adversarial relationship between the two powers is not inevitable.
"There is no reason that we should have China as an enemy," Smith said. "We should certainly look for ways to work together."
The report's assessment of China's naval capabilities draws on information from think tanks and U.S. naval intelligence. It said China is known to be building seven classes of vessels, including nuclear and diesel submarines, destroyers and other warships. It expects the naval modernization to continue for the "forseeable future."
China's is also advancing its capabilities in space, which is viewed as critical because of the use of communication satellites for intelligence and modern warfare.
For the first time, there are public indications China may be developing the ability to target satellites at the high altitude used by the U.S. global positioning system and many military and intelligence satellites, according to the report.
But China described a May suborbital rocket launch it conducted as part of a high-altitude scientific experiment.
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