According to Thursday's report, China is working on a "stealthy, long-range strategic bomber with a nuclear delivery capability that could be operational within the next 10 years", in addition to the bombers it already operates.
It is estimated China spent more than $190bn (£149bn) on defence past year, with the Pentagon predicting a rise to $240bn (188bn) by 2028.
"One of the arguments in favour of developing such a force is that American rivals like China appear increasingly ready to strike USA space-based capabilities in the event of a conflict", according to The Guardian.
A new Pentagon report says China's military has expanded its bomber operations in recent years while "likely training for strikes" against the US and its allies.
China has been expanding what appear to be military facilities on islands in the South China Sea and has landed bombers on the outposts during training exercises.
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The Pentagon report says the Chinese air force has been "re-assigned" a nuclear mission.
"The goal of these reforms is to create a more mobile, modular, lethal ground force capable of being the core of joint operations", it says.
In the case of China's air power, the report states that Chinese bombers are developing capabilities to hit targets as far from China as possible. The Trump administration is also mulling a Space Force in order to counter threats in space from countries including China.
China has not yet commented on the report.
"The PLA continues to strengthen its military space capabilities despite its public stance against the militarization of space", it said.
The increased military spending and focus on specialized airstrikes come as China and the US struggle to resolve diplomatic tensions over trade, reports CNBC.
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The US military regularly seeks to demonstrate freedom of navigation by flying over the South China Sea.
China sees Taiwan as a renegade province, while the U.S. backs its independence.
The document warns that China "is likely preparing for a contingency to unify Taiwan with China by force".
The East China Sea and the South China Sea have been flashpoints for provocative military behaviour from China and its neighbours, to the ire of the US.
Chinese foreign ministry officials have claimed the U.S. is "running amok" in the region.
"Should the United States intervene, China would try to delay effective intervention and seek victory in a high-intensity, limited war of short duration".
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And in June, James Mattis became the first USA defence secretary to visit China since 2014.