"The US intelligence community estimates that China will require until the end of this decade or later for its military modernization program to produce a modern force, capable of defeating a moderate-size adversary," the report said.
China is estimated to spend between US$50 billion and US$70 billion a year on its military budget, making it the third largest defense spender in the world. The US, which spends more money on defense than any other nation, has a military budget of approximately US$400 billion.
One of the key goals to China's military transformation is to thwart intervention by the US or other countries in the Taiwan Strait, the Pentagon said.
"Preventing foreign military intervention, particularly along China's coast, has been a goal for Beijing throughout history, reinforcing the geostrategic value of Taiwan for China's security planners," the report said.
Currently, Beijing does not appear to be contemplating military action against Taiwan, primarily because of two factors: Lack of military capabilities and "potential repercussions of any use of force against Taiwan."
One of those repercussions would be severe, long-term damage to China's economy, in part because Taiwan is the authoritarian giant's largest source of foreign direct investment.
Still, the report said, there was plenty of room for the Chinese Communist Party to miscalculate its military capabilities and the international situation, thus leading to a cross-strait conflict involving the US and Japan.
"China's leaders may overestimate the proficiency of their forces," the report said.
"Beijing could use limited strikes, employing information operations, special operations forces on Taiwan, and SRBM [Short-range Ballistic Missiles] or air strikes at key military or political sites, to try to break the will of Taiwan's leadership and population," the Pentagon wrote.
"Although Beijing might view these as a complement to non-military coercion and as less than a full use of force, others may view such actions differently," it said.
"Such a Chinese miscalculation could lead to a full-fledged conflict."
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