Simultaneous US-China Military Drills in South China Sea
In early 2026, the United States and China simultaneously conducted large-scale military exercises in the South China Sea, raising the risk of accidental conflict to its highest level since the end of the Cold War. This tension is not merely a bilateral issue but a structural turning point that fundamentally shakes the security order across the Indo-Pacific and the stability of the global economy.
── Understand in 3 points ─────────
- • From January to March 2026, the U.S. Navy deployed two carrier strike groups to the South China Sea and conducted joint exercises "Pacific Iron Shield 2026" with the Philippines and Japan.
- • The Chinese People's Liberation Army simultaneously conducted the "Joint Sword-2026A" exercise across the entire South China Sea, mobilizing over 40 vessels, including the aircraft carrier "Fujian."
- • The military hotline (crisis management communication channel) between the U.S. and China has been virtually non-functional since late 2025, lacking an escalation prevention mechanism in case of accidental contact.
── NOW PATTERN ─────────
The U.S. and China are caught in a "spiral of conflict" due to reciprocal military shows of force, a structure where neither side can back down. Simultaneously, multi-layered alliance realignments are amplifying China's sense of crisis, while the U.S.'s risk of "power overextension" is accelerating the spiral.
── Probability and Response ──────
• Base case 55% — Reports of resumed informal contact between U.S. and Chinese diplomatic authorities, moves to reopen military hotlines, stabilization of the frequency of close encounter incidents, and setting up of summit meetings at G20 and APEC.
• Bull case 15% — Early setting of a Trump-Xi Jinping summit, official announcement of military hotline resumption, reduction in frequency and scale of exercises in the South China Sea, and initiation of comprehensive negotiations linked to tariff reductions.
• Bear case 30% — Occurrence of physical contact in close encounter incidents, casualties among Philippine military personnel, China's de facto occupation of new reefs/atolls, simultaneous intensification of military pressure in the Taiwan Strait, and discussions in the U.S. Congress regarding authorization for the use of force against China.
📡 THE SIGNAL — What Happened
Why it matters: In early 2026, the United States and China simultaneously conducted large-scale military exercises in the South China Sea, raising the risk of accidental conflict to its highest level since the end of the Cold War. This tension is not merely a bilateral issue but a structural turning point that fundamentally shakes the security order across the Indo-Pacific and the stability of the global economy.
- Military — From January to March 2026, the U.S. Navy deployed two carrier strike groups to the South China Sea and conducted joint exercises "Pacific Iron Shield 2026" with the Philippines and Japan.
- Military — The Chinese People's Liberation Army simultaneously conducted the "Joint Sword-2026A" exercise across the entire South China Sea, mobilizing over 40 vessels, including the aircraft carrier "Fujian."
- Diplomacy — The military hotline (crisis management communication channel) between the U.S. and China has been virtually non-functional since late 2025, lacking an escalation prevention mechanism in case of accidental contact.
- Regional — In 2025, the Philippines issued a joint statement expanding the scope of the U.S.-Philippines Mutual Defense Treaty to cover the entire exclusive economic zone (EEZ) of the South China Sea.
- Regional — Vietnam issued a statement calling on both the U.S. and China to "exercise restraint in provocative actions," while also proceeding with additional procurement of Su-35 fighter jets from Russia.
- Diplomacy — Japan dispatched Foreign Minister Iwao to Beijing in February 2026, seeking to maintain diplomatic channels for de-escalation, but no concrete results were achieved.
- Economy — The annual trade volume passing through the South China Sea is approximately $5.3 trillion, with about 30% of global trade relying on this waterway.
- Military — Between January and March 2026, at least 12 incidents of close encounters between U.S. and Chinese military aircraft and warships were reported in the South China Sea, a threefold increase compared to the same period last year.
- International Law — China continues to adhere to its "Nine-dash line" sovereignty claims in the South China Sea, persistently ignoring the 2016 arbitral tribunal ruling.
- Technology — Satellite image analysis published in February 2026 indicated that China has deployed new YJ-21 anti-ship ballistic missiles on its artificial islands in the South China Sea.
- Alliance — AUKUS (U.S., UK, Australia) commenced the second phase of nuclear submarine technology transfer to Australia in March 2026, drawing strong condemnation from China as an "act that fuels a regional arms race."
- Resources — The South China Sea is estimated to hold 11 billion barrels of oil and 190 trillion cubic feet of natural gas, with resource competition also contributing to the tensions.
The intensification of U.S.-China confrontation in the South China Sea is not a sudden, unforeseen crisis. It is the culmination of decades of structural dynamics and the sharpest manifestation of a fundamental reorganization of the post-Cold War international order.
Its historical roots trace back to 1947, when the Republic of China (later succeeded by the People's Republic of China) established the "Eleven-dash line" (later revised to the Nine-dash line), asserting sovereignty over nearly the entire South China Sea. This issue, overshadowed by the U.S.-Soviet rivalry during the Cold War, rapidly came to the forefront with China's economic rise since the 1990s.
The turning point was the 2012 Scarborough Shoal incident. After a standoff with the Philippines, China brought this atoll under its effective control, subsequently systematizing "gray zone tactics." This dual structure, where large Coast Guard vessels act as a "white fleet" in the front, with the Navy's "gray fleet" held in reserve behind, became an established method for altering the status quo while skillfully staying below the threshold of armed conflict.
Since 2013, China has embarked on unprecedented large-scale artificial island construction in the Spratly Islands. Over 3,200 acres of artificial landforms were created on features such as Fiery Cross Reef, Subi Reef, and Mischief Reef, equipped with 3,000-meter runways, radar facilities, and anti-air/anti-ship missile systems. This proceeded despite President Xi Jinping's 2015 promise to President Obama not to militarize them. This breach of promise critically damaged strategic trust between the U.S. and China.
In 2016, in the South China Sea arbitration case brought by the Philippines, the Permanent Court of Arbitration delivered a landmark ruling rejecting China's claims of historical rights based on the Nine-dash line. However, China dismissed this ruling as "a piece of paper" and completely ignored it. At that moment, the international law-based dispute resolution mechanism was effectively rendered powerless in the South China Sea.
The first Trump administration (2017-2021) significantly increased the frequency of "freedom of navigation operations," and the Biden administration further expanded them. Concurrently, the Marcos Jr. administration in the Philippines reversed the pro-China stance of the previous Duterte administration and re-strengthened its alliance with the United States. In 2024, access to four new military sites under EDCA (Enhanced Defense Cooperation Agreement) was realized, dramatically improving the U.S. military's forward deployment capabilities in the South China Sea.
So, why "now"? Multiple structural factors converged to escalate tensions in early 2026. First, China's domestic economic slowdown. The prolonged real estate crisis, persistently high youth unemployment, and sustained deflationary pressure have strengthened the Xi Jinping administration's incentive to redirect domestic discontent outwards. Historically, authoritarian regimes tend to adopt a tougher stance externally when their domestic legitimacy is challenged.
Second, the China policy of the second Trump administration, which took office in January 2025. It intensified pressure on both economic and security fronts, including significant increases in comprehensive tariffs on China, tighter semiconductor export controls, and accelerated arms sales to Taiwan. In response, China established a pattern of reacting with military shows of force.
Third, changes in technological military capabilities. The Chinese Navy surpassed the U.S. Navy in ship numbers in the early 2020s, becoming the world's largest navy with over 370 vessels by 2026. The operationalization of the aircraft carrier "Fujian"'s electromagnetic catapult system, the deployment of hypersonic anti-ship missiles, and the expansion of underwater unmanned vehicle (UUV) networks have significantly enhanced China's anti-access/area denial (A2/AD) capabilities in the South China Sea, both qualitatively and quantitatively. The U.S. military's traditional overwhelming superiority has relatively diminished, and this "capability crossover" is encouraging bolder actions from the Chinese side.
Fourth, the realignment of alliance networks. Multi-layered security networks are forming around China, including AUKUS, the Japan-U.S.-Australia-India QUAD, the strengthening of the U.S.-Philippines alliance, and the deepening of Japan-Philippines defense cooperation. China perceives this as the construction of an "Asian NATO" and feels the necessity for military demonstrations to break through this encirclement.
As these factors act simultaneously, the South China Sea has transformed from a mere territorial dispute area into a "geopolitical fault line" where U.S.-China strategic competition is most acute. The simultaneous military exercises in 2026 are a clear signal that this structural tension has entered a new phase.
The delta: In early 2026, an unprecedented situation arose with the U.S. and China simultaneously conducting large-scale military exercises in the South China Sea. The overlap of exercises, which were traditionally staggered, structurally increased the risk of accidental conflict. Furthermore, the non-functionality of crisis management communication channels means that the "safety valve" for preventing escalation has been removed. This indicates a qualitative shift in South China Sea tensions from "managed competition" to "uncontrollable confrontation."
🔍 Between the Lines — What the News Isn't Saying
While official statements reiterate the principles of "freedom of navigation" and "sovereignty defense," the true motivation for both countries conducting large-scale exercises simultaneously lies in domestic politics. The Trump administration needs a record of "toughness on China" for the 2026 midterm elections, while the Xi Jinping administration needs to deflect public dissatisfaction with the economic slowdown by emphasizing external threats. It is noteworthy that the "non-functionality" of the crisis management communication channel is likely a political choice rather than a technical failure. Both countries are reluctant to have the hotline's resumption seen as a "diplomatic concession," intentionally allowing the communication breakdown to persist. This "managed disconnection" is precisely the most dangerous factor artificially increasing the risk of accidental conflict.
NOW PATTERN
Spiral of Conflict × Alliance Strain × Power Overextension
The U.S. and China are caught in a "spiral of conflict" due to reciprocal military shows of force, a structure where neither side can back down. Simultaneously, multi-layered alliance realignments are amplifying China's sense of crisis, while the U.S.'s risk of "power overextension" is accelerating the spiral.
Intersection of Dynamics
The three dynamics of "spiral of conflict," "alliance strain," and "power overextension" do not operate independently but form a complex system that mutually reinforces itself. The inherent danger of the 2026 South China Sea crisis lies at the intersection of these three dynamics.
The spiral of conflict accelerates alliance realignment. As military tensions between the U.S. and China heighten, the Philippines and Japan are compelled to deepen their alliances with the U.S., and the strategic significance of AUKUS and QUAD also increases. However, this strengthening of alliance networks heightens China's perception of threat, prompting further military countermeasures, thereby accelerating the spiral. In other words, the spiral of conflict and alliance realignment form a mutually amplifying feedback loop.
This feedback loop, in turn, promotes power overextension for both the U.S. and China. As the spiral accelerates, both countries are forced to commit more resources to the South China Sea, diminishing their capacity to address other challenges (such as domestic economy, security in other regions, and climate change countermeasures). However, the recognition of overextension does not immediately lead to de-escalation because the dynamics of the spiral create a perception that "whoever backs down first loses."
Even more dangerous is that cracks within the alliance network make controlling the spiral difficult. The fragmentation of ASEAN weakens regional multilateral consultation mechanisms for de-escalation. The stagnation of negotiations for a Code of Conduct (COC) in the South China Sea for over 20 years is a manifestation of this structural problem. Furthermore, disunity among allies could cast doubt on the credibility of U.S. deterrence, potentially allowing China to calculate that it can "exploit vulnerabilities."
The intersection of these three dynamics forms, so to speak, a "triangle of instability." A structural dilemma exists where attempting to mitigate one dynamic may worsen another. For example, weakening alliances (reducing military presence for de-escalation) might embolden China's actions and accelerate the spiral in a different way. Conversely, strengthening alliances, while effective for short-term deterrence, carries the risk of accelerating the spiral in the medium to long term. To break this structural dilemma, an extremely difficult political decision is required: for both the U.S. and China to bear the domestic political costs and agree to reconstruct crisis management mechanisms.
📚 Pattern History
1914: The Balkan Crises and European Alliance Networks Before World War I
Spiral of Conflict + Alliance Strain
Structural similarities with the present: Multi-layered alliance networks and reciprocal military shows of force escalated a localized incident (the Sarajevo assassination) into a full-scale war. The lesson that automatic alliance participation mechanisms made crisis management impossible directly applies to the current Indo-Pacific alliance structure.
1962: U.S.-Soviet Nuclear Standoff in the Cuban Missile Crisis
Spiral of Conflict + Power Overextension
Structural similarities with the present: The military confrontation between superpowers reached the brink of nuclear war but was averted by back-channel diplomacy and mutual rational calculation (recognition of mutually assured destruction). What is missing in the current South China Sea situation is precisely this functioning back-channel and a clear mutual understanding of "red lines."
2001: Hainan Island Incident (EP-3 Reconnaissance Plane Collision)
Spiral of Conflict
Structural similarities with the present: A U.S. Navy reconnaissance plane and a Chinese military fighter jet made contact over the South China Sea, leading to the U.S. aircraft's emergency landing on Hainan Island. The accidental contact escalated into a diplomatic crisis, but at the time, U.S.-China relations were relatively stable, leading to the crew's release within 11 days. Given the current deterioration of U.S.-China relations, resolving a similar incident would be more difficult.
2012-2016: From Scarborough Shoal Standoff to Arbitral Tribunal Ruling
Spiral of Conflict + Alliance Strain
Structural similarities with the present: China's salami-slicing tactics (accumulation of small faits accomplis) established a precedent of ignoring international legal rulings. The fact that the Philippines gained a legal victory but lacked effective enforcement exposed the limits of a rules-based order.
2022-2023: Philippine Resupply Vessel Harassment at Second Thomas Shoal (Ren'ai Jiao)
Spiral of Conflict + Power Overextension
Structural similarities with the present: Repeated incidents of water cannoning and collisions by the China Coast Guard against Philippine resupply vessels intensified discussions regarding the application of the U.S.-Philippines Mutual Defense Treaty. The escalation of gray zone tactics served as a "test" of alliance commitments.
Patterns Revealed by History
The most important pattern revealed by historical precedents is that the risk of military confrontation between great powers escalating to accidental conflict depends more on the presence of crisis management mechanisms and political will than on the balance of military power itself. In the 1962 Cuban Missile Crisis, despite being on the brink of nuclear war, back-channel diplomacy and mutual rational calculation functioned. In contrast, in Europe in 1914, automatic alliance participation mechanisms made crisis management impossible.
The current situation in the South China Sea is particularly concerning because it combines 1914-type risk factors (multi-layered alliances, reciprocal military shows of force, domestic political pressure for escalation) with a lack of 1962-type risk mitigation factors (functioning crisis management communication, clear sharing of red lines). The 2001 Hainan Island incident showed that accidental contact can escalate into a diplomatic crisis, but the degree of U.S.-China confrontation is fundamentally different now compared to then.
The greatest lesson history teaches is that conflicts between great powers are most likely to occur not as planned wars, but as escalations of failed crises. The surge in close encounter incidents in the South China Sea and the non-functionality of crisis management channels suggest that this historical pattern is precisely what is being replayed.
🔮 Next Scenarios
Military tensions between the U.S. and China will remain high throughout 2026 but will not escalate into direct military conflict. Close encounter incidents and minor frictions will be frequent, but both sides will intend to avoid full-scale escalation, and unofficial diplomatic channels will perform minimal functions.
Specifically, incidents of close encounters between U.S. and Chinese military aircraft and warships in the South China Sea will increase to approximately 30-50 per year, but no incidents involving physical damage will occur. Harassment of Philippine vessels by the China Coast Guard will continue, but situations resulting in casualties will be avoided. The U.S. will maintain freedom of navigation operations at a pace of 1-2 times per month, and China will protest each time as a "violation of sovereignty," but both sides will implicitly accept this pattern.
In the latter half of 2026, U.S.-China summit-level contact, utilizing the G20 Summit (South Africa) and APEC Leaders' Meeting, may materialize, and discussions towards reopening military hotlines could begin. However, the fundamental conflict structure in the South China Sea will not be resolved, and "managed instability" will become the norm. The issue of Second Thomas Shoal for the Philippines will remain status quo, and the militarization of China's artificial islands will further progress, but actions exceeding any "new red lines" will be avoided.
Implications for Investment/Action: Reports of resumed informal contact between U.S. and Chinese diplomatic authorities, moves to reopen military hotlines, stabilization of the frequency of close encounter incidents, and setting up of summit meetings at G20 and APEC.
By 2026, the U.S. and China agree to reconstruct crisis management mechanisms in the South China Sea, leading to a significant de-escalation of tensions. For this scenario to materialize, significant changes in the domestic political situations of both sides are necessary.
The most probable trigger is a renewed recognition of economic interdependence. An escalation of the U.S.-China tariff war inflicting severe damage on both economies, particularly if the Trump administration faces domestic inflationary pressures and market instability, could create political incentives for de-escalation with China. China, too, facing a real estate crisis and export slowdown, would be compelled to send stable signals to stem the outflow of foreign capital.
Specifically, the U.S. and China could reach agreements such as: (1) resumption of military hotlines and institutionalization of regular military dialogues, (2) a bilateral agreement on "rules of conduct" for avoiding accidental clashes in the South China Sea, and (3) practical arrangements for codes of conduct during maritime encounters. This would significantly reduce the frequency of close encounter incidents, and military exercises by both countries would revert to being conducted at separate times. However, even in this scenario, fundamental conflicts such as territorial disputes in the South China Sea and the existence of artificial islands would not be resolved. Stabilization would merely be an improvement at the "management" level, not a "solution."
Implications for Investment/Action: Early setting of a Trump-Xi Jinping summit, official announcement of military hotline resumption, reduction in frequency and scale of exercises in the South China Sea, and initiation of comprehensive negotiations linked to tariff reductions.
By 2026, an accidental or intentional military conflict occurs in the South China Sea, fundamentally deteriorating the regional security environment. There are multiple pathways to this scenario.
The most probable pathway is the escalation of accidental contact. A close encounter between U.S. and Chinese military aircraft leads to physical contact (collision), a repeat of the 2001 Hainan Island incident, but with resolution being extremely difficult in the current political environment. If pilot fatalities or aircraft shoot-downs occur, public opinion in both countries would be enraged, making a politically "non-retaliatory resolution" impossible.
The second pathway is an escalation of China Coast Guard harassment against the Philippines, resulting in casualties among Philippine military personnel. In this case, the activation of Articles 4 and 5 of the U.S.-Philippines Mutual Defense Treaty would be debated, compelling the U.S. to consider direct military action. This would be an extremely dangerous phase, testing the extent of the Trump administration's commitment to defending its allies.
The third pathway is a spillover of tensions from the Taiwan Strait into the South China Sea. Intensified military pressure against Taiwan, coupled with actions in the South China Sea, would lead to simultaneous crises on multiple fronts.
In any pathway, the impact of a military conflict would be immense. If navigation in the South China Sea is even temporarily disrupted, the impact on global trade could amount to hundreds of billions of dollars annually. Energy prices would skyrocket, and supply chain disruptions could surpass those of the 2020 COVID-19 pandemic. A financial market shock would trigger a global stock market downturn, and concerns about the crisis spilling over to the Taiwan Strait would severely impact semiconductor supply.
Implications for Investment/Action: Occurrence of physical contact in close encounter incidents, casualties among Philippine military personnel, China's de facto occupation of new reefs/atolls, simultaneous intensification of military pressure in the Taiwan Strait, and discussions in the U.S. Congress regarding authorization for the use of force against China.
Key Triggers to Watch
- Occurrence of physical contact incidents between U.S. and Chinese military aircraft/warships: April-December 2026 (continuation of exercise season)
- Major harassment incident by China Coast Guard at Second Thomas Shoal, Philippines (resulting in casualties): May-August 2026 (increased pressure due to difficult resupply during southwest monsoon season)
- Realization or failure of U.S.-China summit meeting at the G20 Summit (South Africa): November 2026
- Potential for China to establish a new Air Defense Identification Zone (ADIZ) in the South China Sea: Second half of 2026
- Confirmation of delivery date for the first AUKUS nuclear submarine to Australia and China's reaction: Late 2026 - Early 2027
🔄 Tracking Loop
Next Trigger: Next resupply operation to Second Thomas Shoal, Philippines (scheduled for April-May 2026) — The intensity of the China Coast Guard's response will be the most critical event determining the future direction of the South China Sea situation.
Continuation of this pattern: Tracking Theme: South China Sea U.S.-China Standoff 2026 — The next milestones are China's response to the Philippine resupply operation in May 2026, followed by the success or failure of the U.S.-China summit at the G20 in November 2026.
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