"The PLA may continue to extend its operations beyond the first island chain, demonstrating the capability to strike US and allied forces and military bases in the western Pacific Ocean, including Guam", according to the report.
The report indicates that over the past three years the PLA has rapidly expanded its overwater bomber operating areas, likely training for strikes against USA and allied targets in the Pacific region.
China "has been developing strike capabilities to engage targets as far away from China as possible", the report states.
The PLA may demonstrate the "capability to strike United States and allied forces and military bases in the western Pacific Ocean, including Guam", the report continues.
The Pentagon report warns Beijing has boosted its ability to send bombers further afield and highlights the country's beefed up military capability and its £150bn defence budget.
The Pentagon's annual reports on China's military have riled tensions between the two nations in the past, with Beijing calling last year's report "irresponsible" after it predicted that China would seek to establish overseas military bases in countries such as Pakistan. The defense expenditure is expected to rise to $240 billion over 10 years.
The US is watching Chinese activities carefully as China's power grows in what the Pentagon argues is an era of renewed "great power competition".
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.
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"The is undergoing the most comprehensive restructure in its history to become a force capable of conducting complex joint operations", the wrote.
This year China's air force landed bombers on islands and reefs in the South China Sea as part of a training exercise in the disputed region.
Chinese authorities didn't immediately comment on the document, which was published as the US and China prepare to resume stalled talks after the two nations imposed steep tariffs on each others' exports.
Most specifically, the agency is concerned about China's growing influence in the South China Sea.
The drills, carried out by the People's Liberation Army's (PLA) digital combat unit in the Qinghai-Tibet Plateau, mainly tested the complete digital combat system in the extreme environment, Beijing-based military expert and TV commentator Song Zhongping told Global Times on Thursday.
The document also shines a light on China's ongoing military preparations for a "contingency" in the Taiwan Strait.
Taiwan's incumbent President Tsai Ing-wen (蔡英文) of the independence-leaning Democratic Progressive Party has refused to recognize the "consensus", a tacit understanding there is "one China", with each side having its own interpretation of what "one China" means. As per the report, the United States and China have announced tariffs on a range of goods belonging to each other.