With recent tests, China may be trying to show off its "capability to strike US and allied forces and military bases in the western Pacific Ocean, including Guam", the report said, according to BBC News.
Report says People's Liberation Army has rapidly expanded bomber operating areas for likely strikes against the U.S.; Jennifer Griffin reports on the details.
The Pentagon says China's military capacity in space is on the rise too, despite what the report calls a "public stance" from Beijing against the militarization of space.
Tensions are also running high in the non-military sphere with the USA railing against its growing trade deficit with China and both sides slapping trade tariffs on each others' goods.
"Over the last three years, the PLA (People's Liberation Army) has rapidly expanded its overwater bomber operating areas, gaining experience in critical maritime regions and likely training for strikes against USA and allied targets", CNN quoted the report as saying on Thursday.
But the piece also confirmed that China is working to expand its military prowess, saying "the PLA will surely develop its air force with long-range strike capability", and "China is developing its strategic nuclear capability".
The new report said that China's space program "continues to mature rapidly" and is also developing counterspace capabilities to "degrade and deny adversary use of space-based assets during a crisis or conflict".
"The objective of these reforms is to create a more mobile, modular, lethal ground force capable of being the core of joint operations", the report says.
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But Trump backed away from the agreement and the two nations have been locked in a tit-for-tat trade war ever since. West Texas Intermediate and international-benchmark Brent crude oil futures are trading slightly lower on Thursday.
The Pentagon report said Chinese President Xi Jinping's signature infrastructure policy, the Belt and Road Initiative (BRI), served to encourage countries to fall into line with China's ambitions.
"The PLA may continue to extend its operations beyond the first island chain, demonstrating the capability to strike U.S. and allied forces and military bases in the western Pacific Ocean, including Guam".
China's military budget for 2017 was about US$190 billion (S$260 billion), according to the report, far behind the Pentagon's annual budget of about US$700 billion.
China sees Taiwan as a renegade province, while the United States backs its independence.
"Should the United States intervene, China would try to delay effective intervention and seek victory in a high-intensity, limited war of short duration", the report warns.
The Pentagon report is at pains to stress that the U.S. "seeks a constructive and results-oriented relationship with China".
Despite tensions, in June, James Mattis became the first USA defence secretary to visit China since 2014.