The Pentagon report, released Friday, expressed concerns about Beijing's rising military spending, especially on equipment to project military power well beyond China's borders.
China has accused Washington of trying to mislead public opinion.
Kong Quan, the spokesman for the Chinese foreign ministry, said the report made "groundless accusations regarding the normal national defense development in China, interferes with China's domestic affairs and plays up the theory of the Chinese military threat, thereby misleading public opinion."
He added that China was an important force that promoted peace and stability in the Asia-Pacific region and around the world.
The United States, he said, "should correct its wrong view and treat China's peaceful development in an objective and positive manner."
China's official military budget for 2005 was just short of $30 billion, after a decade of double-digit annual increases, but foreign analysts say the true spending is several times that.
A Pentagon report last year put the figure at $50-$70 billion, which it said was the world's third-highest military budget.
The latest report said that of the major and emerging powers, China had the greatest potential to compete militarily with the United States and field disruptive military technologies that could, over time, offset long-standing US military advantages.
China has spent heavily in recent years to modernise its 2.5 million-member army, focusing on adding high-tech weapons to extend its reach and back up threats to attack rival Taiwan.
By comparison earlier this week US President George Bush proposed an increased American military budget of $439 billion for 2006.