By David Alexander and Phil Stewart
WASHINGTON (Reuters) - China is using espionage to acquire technology to fuel its military modernization, the Pentagon said on Monday, for the first time accusing the Chinese of trying to break into U.S. defense computer networks and prompting a firm denial from Beijing.
In its 83-page annual report to Congress on Chinese military developments, the Pentagon also cited progress in Beijing's effort to develop advanced-technology stealth aircraft and build an aircraft carrier fleet to project power further offshore.
The report said China's cyber snooping was a "serious concern" that pointed to an even greater threat because the "skills required for these intrusions are similar to those necessary to conduct computer network attacks."
"The U.S. government continued to be targeted for (cyber) intrusions, some of which appear to be attributable directly to the Chinese government and military," it said, adding the main purpose of the hacking was to gain information to benefit defense industries, military planners and government leaders.
A spokeswoman said it was the first time the annual Pentagon report had cited Beijing for targeting U.S. defense networks, but China dismissed the report as groundless.
The U.S. Defense Department had repeatedly "made irresponsible comments about China's normal and justified defense build-up and hyped up the so-called China military threat," Chinese Foreign Ministry spokeswoman Hua Chunying said.
"This is not beneficial to U.S.-China mutual trust and cooperation," Hua told reporters. "We are firmly opposed to this and have already made representations to the U.S. side."
China's defense build-up was geared towards protecting its "national independence and sovereignty," Hua said.
On the accusations of hacking, Hua said: "We firmly oppose any groundless criticism and hype, because groundless hype and criticism will only harm bilateral efforts at cooperation and dialogue."
Despite concerns over the intrusions, a senior U.S. defense official said his main worry was the lack of transparency.
"What concerns me is the extent to which China's military modernization occurs in the absence of the type of openness and transparency that others are certainly asking of China," David Helvey, deputy assistant secretary of defense for East Asia, told a Pentagon briefing on the report.
He warned of the "potential implications and consequences of that lack of transparency on the security calculations of others in the region."
The annual China report, which Congress began requesting in 2000, comes amid ongoing tensions in the region due to China's military assertiveness and expansive claims of sovereignty over disputed islands and shoals. Beijing has ongoing territorial disputes with the Philippines, Japan and other neighbors.
Beijing's publicly announced defense spending has grown at an inflation-adjusted pace of nearly 10 percent annually over the past decade, but Helvey said China's actual outlays were thought to be higher.
China announced a 10.7 percent increase in military spending to $114 billion in March, the Pentagon report said. Publicly announced defense spending for 2012 was $106 billion, but actual spending for 2012 could range between $135 billion and $215 billion, it said. U.S. defense spending is more than double that, at more than $500 billion.
The report highlighted China's continuing efforts to gain access to sophisticated military technology to fuel its modernization program. It cited a laundry list of methods, including "state-sponsored industrial and technical espionage to increase the level of technologies and expertise available to support military research, development and acquisition."
Dean Cheng, an analyst at the conservative Heritage Foundation think tank, said he was surprised by the number of cases of human espionage cited in the report.
"This is a PLA (People's Liberation Army) that is extensively, comprehensively modernizing," Cheng said. "...China is also comprehensively engaging in espionage."
China tested its second advanced stealth fighter in as many years in October 2012, highlighting its "continued ambition to produce advanced fifth-generation fighter aircraft," the report said. Neither aircraft of its stealth aircraft was expected to achieve effective operational capability before 2018, it said.
Last year also saw China commission its first domestically produced aircraft carrier. China currently has one aircraft carrier bought abroad and conducted its first takeoff and landing from the ship in November.
(Reporting By David Alexander and Phil Stewart, Additional reporting by Michael Martina in Beijing; Editing by Nick Macfie)