"It is clear that the US-China relationship will be complex as we continue to balance our competition and cooperation," Carter told the Senate Armed Services Committee.
He said there are opportunities to improve understanding and reduce risks with China. "We've agreed to four confidence- building agreements, including one meant to prevent dangerous air-to-air encounters. But there remain areas of concern."
China claims most of the South China Sea, but Vietnam, the Philippines, Malaysia, Brunei and Taiwan have rival claims.
The US has decades-old military presence in the region and it has been been instrumental in upholding the rules-based international system and laid the foundation for peace and security in the region, Carter said about the sea lane through which more than USD5 trillion in global trade passes annually.
He said the US also expects China to uphold President Xi Jinping's pledge not to pursue militarisation in the Spratly Islands. "We are closely watching the long-term, comprehensive military modernisation program that China, as well as other countries, continues to pursue."
While there is no question that the US retains a decisive military edge in the Asia-Pacific, China is investing in capabilities to counter third-party -- including the US -- intervention during a crisis or conflict, he said.
Testifying at the same committee, Gen Joseph F Dunford, chairman of the Joint Chiefs of Staff, said China's expanding presence in Asia increase the "possibility of miscalculation."
"China is also seeking to improve the joint capability of its armed forces to project power -- enhancing its ability to fight and win a high-intensity regional conflict," he said.
"China is also investing in land attack and anti-ship cruise missiles, counter-space weapons, cyber, improved capabilities in nuclear deterrence and long-range conventional strike, advanced fighter aircraft, integrated air defences, undersea warfare, and command and control capabilities."
"By pursuing a diverse and capable range of offensive space control and counter-space capabilities, China is also working to diminish US space dominance," he said.
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