South China Sea: Simultaneous US-China Military Drills —
In early 2026, the simultaneous large-scale military exercises conducted by the United States and China in the South China Sea have pushed the risk of accidental military conflict to its highest level since the Cold War. This situation is not merely a military demonstration but a structural turning point that shakes the very foundation of the Indo-Pacific order.
── 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 the joint exercise "Balikatan 2026" with the Philippines and Japan.
- • The Chinese People's Liberation Army conducted integrated naval and air exercises, primarily in the Southern Theater Command, during the same period, deploying a fleet including the aircraft carrier "Fujian" to the South China Sea.
- • Since 2024, the Philippines has seen normalized confrontations with the China Coast Guard around Second Thomas Shoal, leading to active discussions regarding the scope of application of the U.S.-Philippines Mutual Defense Treaty.
── NOW PATTERN ─────────
The dominant pattern is a "spiral of conflict" where both the U.S. and China continuously strengthen their military presence in the South China Sea, compounded by China's "power overreach" and "alliance strains" within ASEAN.
── Probability and Response ──────
• Base case 55% — Regular use of the U.S.-China military hotline, contact between U.S. and Chinese diplomats at ASEAN-related meetings, the frequency of close encounter incidents not significantly exceeding 2025 levels, and rhetoric from both sides not reaching "war preparation" levels.
• Bull case 20% — A joint statement on the South China Sea at a U.S.-China summit, agreement to expand the military hotline, reactivation of COC negotiations between ASEAN and China, conduct of joint U.S.-China maritime search and rescue exercises, and a significant decrease in close encounter incidents.
• Bear case 25% — A collision with casualties at Second Thomas Shoal, a U.S.-China military aircraft contact/crash incident, China's occupation of new islands/reefs, direct U.S. freedom of navigation operations near Chinese military bases (a shift from passing within 12 nautical miles to demonstrative actions close to bases), and military actions linked to the Taiwan Strait.
📡 THE SIGNAL — What Happened
Why it matters: In early 2026, the simultaneous large-scale military exercises conducted by the United States and China in the South China Sea have pushed the risk of accidental military conflict to its highest level since the Cold War. This situation is not merely a military demonstration but a structural turning point that shakes the very foundation of the Indo-Pacific order.
- Military — From January to March 2026, the U.S. Navy deployed two carrier strike groups to the South China Sea and conducted the joint exercise "Balikatan 2026" with the Philippines and Japan.
- Military — The Chinese People's Liberation Army conducted integrated naval and air exercises, primarily in the Southern Theater Command, during the same period, deploying a fleet including the aircraft carrier "Fujian" to the South China Sea.
- Diplomacy — Since 2024, the Philippines has seen normalized confrontations with the China Coast Guard around Second Thomas Shoal, leading to active discussions regarding the scope of application of the U.S.-Philippines Mutual Defense Treaty.
- Diplomacy — Japan has increased its FY2026 defense budget to approximately 2% of GDP, accelerating the strengthening of its defense posture in the Southwest Islands.
- Economy — The South China Sea is the world's most critical sea lane, through which approximately $5.3 trillion worth of trade passes annually, and about 80% of Japan's crude oil imports transit this area.
- Legal — China continues to reject the 2016 Permanent Court of Arbitration ruling on the South China Sea as "a piece of paper."
- Military — The U.S.-China Military Maritime Consultative Agreement (MMCA) was partially resumed in 2024 after a hiatus in dialogue since 2023, but its effectiveness remains limited.
- Technology — China has deployed radar, anti-aircraft missiles, and anti-ship missiles on its artificial islands in the South China Sea, effectively building A2/AD (Anti-Access/Area Denial) capabilities.
- Diplomacy — ASEAN nations are working on developing a Code of Conduct (COC) for the South China Sea, but negotiations with China have seen little progress for over 20 years.
- Domestic Politics — Ahead of the U.S. midterm elections in November 2026, the Biden administration (or its successor) faces domestic political pressure to maintain a tough stance on China.
- Resources — Estimated natural gas reserves in the South China Sea are approximately 190 trillion cubic feet, and oil reserves are about 11 billion barrels, with resource nationalism underlying the territorial disputes.
- Military — At least six incidents of close encounters between U.S. and Chinese military aircraft and warships have been reported from late 2025 to early 2026.
The escalation of U.S.-China tensions in the South China Sea is not a problem that suddenly emerged in 2026. Its roots lie in the structural changes of the post-Cold War Asia-Pacific order and the "Thucydides's Trap" brought about by China's rapid rise.
Historically, the South China Sea territorial dispute dates back to the 1940s. The "Eleven-Dash Line" (later inherited as the "Nine-Dash Line" by the People's Republic of China), announced by the Republic of China (later Taiwan) in 1947, is the origin of China's historical claims in this area. However, this issue emerged as an international security concern only after China formally submitted a map including the Nine-Dash Line to the UN in 2009, and further, from 2012 onwards, began effective control of Scarborough Shoal and large-scale artificial island construction in the Paracel and Spratly Islands.
Behind China's expansion into the South China Sea are three structural factors. First, ensuring energy security. China is the world's largest crude oil importer, and approximately 80% of its imported crude oil passes through the Strait of Malacca and the South China Sea. To resolve this "Malacca Dilemma," control of the South China Sea has become a strategic imperative for China. Second, the expansion of military depth. China's strategic nuclear submarines (SSBNs) are homeported at Yulin Base on Hainan Island, and the South China Sea serves as a "sanctuary" to ensure the survivability of its nuclear deterrent. Third, maintaining domestic political legitimacy. For the Xi Jinping administration, which champions the "great rejuvenation of the Chinese nation," the "recovery" of territory and territorial waters is a crucial pillar supporting its legitimacy.
For the United States, on the other hand, the South China Sea is a litmus test for the maritime order based on "freedom of navigation" established after World War II. The U.S. has progressively strengthened its involvement in the South China Sea issue since the 1995 Mischief Reef incident. From the Obama administration's "Pivot to Asia," the first Trump administration's "Free and Open Indo-Pacific," the Biden administration's creation of AUKUS and strengthening of alliance networks, to the present, there has been a continuity of vigilance against China across administrations. In particular, the large-scale military exercises conducted by China around Taiwan after then-Speaker Pelosi's visit to Taiwan in 2022 elevated U.S.-China military tensions to a new level.
From 2024 to 2025, the situation became even more complex. Philippine President Marcos Jr. reversed his predecessor Duterte's conciliatory approach to China and significantly strengthened security cooperation with the United States. New base access agreements under the Enhanced Defense Cooperation Agreement (EDCA), the conduct of joint U.S.-Philippine patrols, and frequent physical clashes between the Philippine Navy and the China Coast Guard over Second Thomas Shoal (Ayungin Shoal) qualitatively transformed tensions in the South China Sea. The issue is no longer an abstract territorial dispute but a risk of physical confrontation and accidental escalation at the operational level.
The simultaneous U.S.-China military exercises in early 2026 are occurring atop this accumulation of over a decade of conflict. China has largely completed the militarization of its artificial islands and is establishing A2/AD capabilities covering the entire South China Sea. In response, the U.S. is expanding the frequency and scale of joint exercises with its allies, promoting a "integrated deterrence" strategy. Both sides are in a politically difficult position to back down, which is accelerating the "spiral of conflict."
Furthermore, this conflict must be understood in the context of broader strategic competition between the U.S. and China. Multiple axes of conflict exist simultaneously, including semiconductor export controls, the Taiwan issue, trade wars, and technological hegemony competition, with a constant risk of tensions in one area spilling over into others. The South China Sea is precisely the "fault line" where these multi-layered U.S.-China tensions are most likely to sharpen.
The delta: The simultaneous U.S.-China military exercises in early 2026 qualitatively transformed military tensions in the South China Sea from a phase of "demonstration and deterrence" to one of "operational confrontation." The greatest structural risk is that the maturity of China's A2/AD capabilities and the full-scale implementation of the U.S.'s integrated deterrence strategy are clashing, and the effectiveness of safety valves (military hotlines, incident prevention mechanisms) to prevent accidental escalation has not kept pace.
🔍 BETWEEN THE LINES — What the News Isn't Saying
The essence of this issue, officially framed as a conflict between "freedom of navigation" and "territorial defense," lies in the military value of the South China Sea as a "sanctuary" for China's strategic nuclear submarine (SSBN) nuclear deterrent. What truly concerns the U.S. is not missiles on artificial islands, but the fact that China's SSBNs, homeported at Hainan Island, are establishing a nuclear retaliation capability from the deep waters of the South China Sea, putting the U.S. mainland within range. Governments on both sides rarely speak publicly about this nuclear dimension, and discussions are intentionally limited to the conventional forces dimension. Simultaneously, from the perspective of U.S. alliance management, the South China Sea functions as a rehearsal space for a Taiwan contingency, revealing a strategic intent to disperse China's resources by placing the Philippines on the front line.
NOW PATTERN
Spiral of Conflict × Power Overreach × Alliance Strains
The dominant pattern is a "spiral of conflict" where both the U.S. and China continuously strengthen their military presence in the South China Sea, compounded by China's "power overreach" and "alliance strains" within ASEAN.
Intersection of Dynamics
The three dynamics of "spiral of conflict," "power overreach," and "alliance strains" form a dangerous complex in the South China Sea, mutually reinforcing each other.
The spiral of conflict progressively escalates the military actions of both the U.S. and China, making retreat difficult due to their respective domestic political pressures. This spiral is further accelerated by China's power overreach. The more China rushes to establish faits accomplis in the South China Sea, the more the U.S. and its allies are compelled to strengthen countermeasures, causing the spiral to spin faster. However, the more assertive China's actions become, the more alliance strains expand, with some ASEAN nations leaning towards the U.S. while others deepen their dependence on China.
Paradoxically, these strains exacerbate the spiral of conflict. ASEAN's inability to form a unified stance leads to the dysfunction of regional frameworks for managing South China Sea tensions, causing the issue to increasingly sharpen as a bilateral U.S.-China conflict. Bilateral conflicts tend to be more zero-sum than multilateral discussions, narrowing the room for compromise.
Furthermore, these three dynamics also interact along the timeline. The perception that a "window of opportunity" exists before China's military capabilities fully close the qualitative gap with the U.S., despite China's continued rapid military expansion, could encourage more assertive actions from the Chinese side. Conversely, the U.S. side also holds the view that "deterrence should be established before China's capabilities improve further," which can serve as a rationale for "preemptive actions" by both sides. This perception of time pressure makes the spiral of conflict even more dangerous.
Ultimately, at the intersection of these dynamics lies the risk of accidental collision. Spiral escalation, the impatience of overstretched powers, and a fragmented regional order—in a situation where these factors operate simultaneously, the probability of a small, on-site incident developing into an uncontrollable escalation is structurally heightened.
📚 PATTERN HISTORY
1914: Outbreak of World War I (Sarajevo Incident)
A chain of alliances and a spiral of conflict escalated a single accidental incident into an uncontrollable major war.
Structural similarities with the present: Complex alliances and military automation (irreversibility of mobilization plans) significantly reduce the controllability of accidental incidents. The current ambiguity surrounding the automatic application of the U.S.-Philippines Mutual Defense Treaty in the South China Sea carries similar risks.
1962: Cuban Missile Crisis
Military confrontation between nuclear powers reached the brink of accidental nuclear war.
Structural similarities with the present: A diplomatic solution was ultimately reached, but only because leaders on both sides shared the understanding that "all-out war serves no one's interests." In the current South China Sea situation, it remains questionable whether this mutual understanding is sufficiently established. Reliable communication mechanisms, like the U.S.-Soviet hotline established after the Cuban Missile Crisis, are not functioning between the U.S. and China.
2001: Hainan Island Incident (EP-3 Incident)
A collision between U.S. and Chinese military aircraft over the South China Sea escalated into a diplomatic crisis.
Structural similarities with the present: Accidental military incidents quickly become politicized, stimulating nationalism on both sides. While diplomatic resolution was possible in 2001 due to relatively stable U.S.-China relations, a similar incident in the current confrontational environment could lead to far more severe consequences.
1988: Spratly Islands Skirmish (China-Vietnam)
A precedent where a South China Sea territorial dispute escalated into military conflict.
Structural similarities with the present: In March 1988, the Chinese Navy and Vietnamese Navy engaged in combat at Johnson South Reef, resulting in 64 Vietnamese fatalities. This incident demonstrates that the possibility of South China Sea territorial disputes escalating into actual armed conflict is not a fantasy.
2012-2016: Scarborough Shoal Standoff to Hague Arbitration Ruling
Attempts at dispute resolution through international legal means were nullified by a great power's rejection.
Structural similarities with the present: China's de facto exclusion of the Philippines during the 2012 Scarborough Shoal standoff and its disregard for the 2016 arbitral tribunal ruling exposed the limitations of existing international legal frameworks for dispute resolution. In an environment where legal means are ineffective, reliance on military means increases.
Patterns Revealed by History
Historical precedents consistently reveal the following three patterns. First, once a spiral of conflict crosses a certain threshold, an accidental incident can trigger systemic escalation (1914-type risk). Second, military confrontation between nuclear powers is manageable only when reliable communication mechanisms exist, and the risk increases exponentially when those mechanisms are fragile (lesson from the Cuban Missile Crisis). Third, when international legal frameworks and multilateral discussions become dysfunctional, the logic of power becomes dominant, increasing the incentive for status quo challengers to act (lesson from Scarborough Shoal).
The current situation in the South China Sea is a rare confluence where these three historical patterns are simultaneously at play. The spiral of conflict is accelerating, the effectiveness of the U.S.-China military hotline is questionable, and international legal means have already been attempted once and failed. While the 2001 Hainan Island incident was diplomatically resolved within the context of relatively calm U.S.-China relations at the time, there is no guarantee that a similar incident in the current structurally confrontational environment would have the same outcome. History teaches that while the probability of military confrontation between great powers leading to accidental conflict is low, the impact, should it occur, is devastating.
🔮 NEXT SCENARIOS
Both the U.S. and China will continue to maintain and strengthen their military presence in the South China Sea, but a "managed confrontation" that avoids direct military conflict will persist throughout 2026. Accidental close encounter incidents and minor frictions will continue to occur, but political leaders on both sides will retain the will to avoid full-scale escalation, and crisis management mechanisms will function at a minimum.
In this scenario, U.S.-China military dialogue will be maintained, albeit limited, and on-site collision avoidance rules (such as CUES: Code for Unplanned Encounters at Sea) will function to some extent. Confrontations over Philippine resupply missions to Second Thomas Shoal will continue but will remain at the level of "water cannoning" or "laser illumination," without escalating to the use of live ammunition or conflicts involving human casualties. Leading up to the U.S. midterm elections in November 2026, the U.S. administration will maintain a tough stance on China while managing the risk of actual military conflict. China, too, will refrain from military adventures due to the need to prioritize domestic economic recovery.
However, this "managed confrontation" is inherently unstable, a fragile equilibrium that could rapidly escalate at any time. Fundamental resolution of the issue will be postponed, the arms race will continue, and future conflict risks will continue to accumulate.
Implications for Investment/Action: Regular use of the U.S.-China military hotline, contact between U.S. and Chinese diplomats at ASEAN-related meetings, the frequency of close encounter incidents not significantly exceeding 2025 levels, and rhetoric from both sides not reaching "war preparation" levels.
Substantial diplomatic progress towards de-escalating tensions in the South China Sea is observed between the U.S. and China. The premise of this scenario is that the domestic political situations in both the U.S. and China shift towards allowing diplomatic compromise.
Specifically, China's economic recovery slows, forcing the Xi Jinping administration to prioritize stability in external relations. Alternatively, after the U.S. midterm elections in 2026, room emerges for the U.S. administration to seek a readjustment of U.S.-China relations. In this case, strengthening confidence-building measures in the South China Sea (operationalizing incident prevention mechanisms, regular use of military hotlines, agreement on codes of conduct for air and sea) could be realized.
In a more optimistic scenario, a framework agreement for a Code of Conduct (COC) in the South China Sea or preliminary agreements on joint resource development in specific areas could be reached. However, the resolution of the territorial dispute itself remains difficult even over several decades, and in this scenario, "managing" tensions is the best possible outcome.
Within ASEAN, Indonesia and Malaysia could strengthen their roles as mediators, partially succeeding in bringing China back to the multilateral negotiation table. In this scenario, Japan would contribute to regional stabilization by balancing the reconstruction of diplomatic channels with China and the strengthening of its defense capabilities.
Implications for Investment/Action: A joint statement on the South China Sea at a U.S.-China summit, agreement to expand the military hotline, reactivation of COC negotiations between ASEAN and China, conduct of joint U.S.-China maritime search and rescue exercises, and a significant decrease in close encounter incidents.
An accidental military conflict occurs between the U.S. and China in the South China Sea, escalating into a regional and global security crisis. This scenario is a pattern where the spiral of conflict crosses a critical point, and an on-site incident triggers political escalation.
The most probable trigger is a physical clash with casualties involving the China Coast Guard during a Philippine resupply mission. If Philippine military personnel are killed, the application of Article 5 of the U.S.-Philippines Mutual Defense Treaty becomes an issue, compelling the U.S. to respond militarily. Alternatively, a collision between U.S. and Chinese military aircraft over the South China Sea (a repeat of the 2001 Hainan Island incident) or an underwater close encounter between a U.S. vessel and a Chinese submarine could also serve as triggers.
If this scenario materializes, an immediate full-scale war is unlikely, but limited military engagements (e.g., naval combat, aircraft shootdowns) could occur. In such a case, public opinion on both sides would boil over, making escalation management extremely difficult. The impact on the global economy would be immense, with temporary closures of commercial shipping lanes in the South China Sea, a surge in crude oil prices (above $120 per barrel), disruption of semiconductor supply chains, and a 15-25% drop in global stock markets being anticipated.
Japan would be one of the most severely affected third-party nations. A blockade of sea lanes would directly hit Japan's energy security, and its rear-area support obligations under the U.S.-Japan alliance carry the risk of drawing Japan into the conflict. Spillover into the Taiwan Strait is also a realistic concern.
Implications for Investment/Action: A collision with casualties at Second Thomas Shoal, a U.S.-China military aircraft contact/crash incident, China's occupation of new islands/reefs, direct U.S. freedom of navigation operations near Chinese military bases (a shift from passing within 12 nautical miles to demonstrative actions close to bases), and military actions linked to the Taiwan Strait.
Key Triggers to Watch
- Casualties resulting from a physical clash with the China Coast Guard during a Philippine resupply mission to Second Thomas Shoal (Ayungin Shoal): April-December 2026 (resupply missions are conducted regularly, each presenting a window of risk).
- Rising anti-China hawkish sentiment within the U.S. ahead of the November 2026 midterm elections and the accompanying expansion of U.S. military presence in the South China Sea: July-November 2026.
- China attempts to establish new structures or conduct reclamation at Scarborough Shoal or Second Thomas Shoal: Throughout 2026 (however, activity may decrease during typhoon season, June-November).
- Progress or breakdown in Code of Conduct negotiations for the South China Sea at ASEAN-related summits (EAS, etc.): October-November 2026 (during ASEAN Summit period).
- Agreement or breakdown regarding the South China Sea at a U.S.-China summit (including bilateral meetings at multilateral forums like the G20): Second half of 2026.
🔄 TRACKING LOOP
Next Trigger: Philippine resupply mission to Second Thomas Shoal (next scheduled around April-May 2026) — The degree of escalation in China Coast Guard interference will be the most crucial event determining the direction of South China Sea tensions in 2026.
Continuation of this pattern: Tracking Theme: Escalation Path of U.S.-China Military Confrontation in the South China Sea — Next milestones are the Second Thomas Shoal resupply mission (April-May 2026) and ASEAN-related summits (October-November 2026).
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