China, since 1949, has not treated its territorial disputes with neighbouring countries as an isolated issue in its foreign and security policy. Rather, Beijing has always handled those territorial issues in the larger context of its strategic interests of the time. Chinese decision-makers made concessions on territorial contentions when they believed that those compromises served China's broader and longer-term strategic benefits. Conversely, China appeared to be quite stubborn when heavy-handedness and assertiveness served its other purposes, either domestic or international.

The South China Sea issue is no exception in China's foreign and security calculations. Over the decades, China's handling of the dispute has been affected by a wide range of factors, apart from territorial or sovereignty claims. There are many good examples to illustrate this point. For instance, it has been argued that the 1974 conflict between China and South Vietnam, which ended in China taking control of the whole Paracels, was partly motivated by Chinese anxiety of a Soviet security threat from the sea. The 1988 Sino-Vietnamese conflict in the Spratlys had to do with the People's Liberation Army (PLA) Navy's interest in pushing for a greater budget when Beijing was reducing military expenditure in the 1980s.The 1995 Mischief conflict was partly a result of internal elite political power struggles in China. And the “calculated moderation” in China's approach to the South China Sea dispute in the past decade reflected China's attempt to balance its interests in domestic economic development, sovereignty claims, and regional strategic interests.These cases sufficiently demonstrate that it is useful and highly necessary to take into consideration many other factors to better understand China's policy on the South China Sea dispute.

This chapter attempts to analyse some of the major factors that have helped to shape China's policy on the South China Sea in the past decade or so. I will then discuss whether the context of China's policy-making, both internal and external, has significantly changed and what impacts this changed context would have on China's future policy on the dispute.

Strategic Interests and Moderation

Throughout the 1990s, China made great efforts to normalize its relations with Southeast Asian states. Departing from its initial approach that favoured bilateral relations, China became more involved in multilateral and regional institutions, especially in frameworks that allowed Beijing to enhance its dialogue with the Association of Southeast Asian Nations (ASEAN).