China's souring foreign investment climate, "unfair" trade practices and inceased military spending heightened tensions between the United States and Beijing in 2014, a US commission said Thursday.

Security ties between the two world powers deteriorated this year amid increased territorial disputes in the South China Sea.

These potential China-US military confrontations risk escalating into a "major political crisis," the US-China Economic and Security Review Commission (USCC) said in its annual report to Congress.

Reports by the commission of former lawmakers, former officials, and other experts have in the past irritated officials in Beijing, where Washington opinions are always under a microscope.

The report said President Xi Jinping's government "made minimal progress in implementing (economic) reforms in 2014, and it remains unclear whether the Xi government will accelerate reform in 2015."

But it made substantial progress on the military development front, USCC reported, citing China's two decades of double-digit increases in its defense budget.

"This trend continued in 2014 with a 12.2 percent increase over the previous year, bringing China's announced projected defense budget to approximately $131.6 billion, though China's actual spending on defense is no doubt larger than this figure," USCC chairman Dennis Shea said while unveiling the report.

China's expanding navy is replacing its surface ships with "modern platforms equipped with advanced, long-range weapon systems and sensors" and increasing its fleet of modern submarines from just one in 2000 to nearly 40 in 2014.

"These developments are enabling China to challenge decades of air and naval dominance by the United States in the Western Pacific, and are contributing to a shift in the regional balance of power in China's direction," he said.

- 'Aggressive behavior' -

The US-China security relationship mostly "deteriorated" in 2014, the report said, citing China's territorial disputes with US treaty allies Japan and the Philippines and Chinese military aircraft and ships confronting US military aircraft and vessels "on several occasions since late 2013."

"On each of these occasions, Chinese military personnel engaged in unsafe, unprofessional, and aggressive behavior that could have resulted in the loss of life or a major political crisis."

The report offered 48 recommendations, including urging Congress to fund increases in the US Navy presence in the Pacific so it can maintain readiness and "offset China's growing military capabilities."

The commission said China's economic policies came up short this year.

Despite China's economy growing at or near its official target rate of 7.5 percent for most of 2014, "the government failed to address China's underlying structural problems, such as oversupply, overcapacity, mounting local government debt, and asset bubbles that put its economy at risk of a sharp slowdown or 'hard landing.'"

China's massive economy is dependent on exports for growth, "a policy supported by an undervalued currency (which) has resulted in China's accumulation of record foreign currency reserves, and contributes to global trade imbalances," according to USCC.

The policy has pinched US opportunities to boost exports to the Asian giant.

"In 2014, Chinese direct investment flows into the United States exceeded US investment into China for the first time as foreign firms faced an increasingly hostile investment climate in China," the commission said.

Despite Washington using diplomacy and enforcement tools to address unfair practices, "Chinese trade violations continue and the bilateral trading relationship grows more lopsided."

China in 2014 shipped nearly four dollars worth of goods to US shores for every dollar in US imports, helping create the world's largest bilateral deficit -- three times the size of the second-largest US deficit, with Japan.

By August, the US trade deficit with China stood at $216 billion, some $8.5 billion more than the same time last year and on pace for another record high.

"Unfortunately, the United States too often chooses dialogue with China over strong enforcement measures," the commission noted.

Foreign direct investment in China has suffered in the January-August period, decreasing by 1.8 percent from the same eight months in 2013, the commission said.

It also shed light on how the "increasing impact of Chinese media and Internet censorship on US company operations and profits both within China and abroad has denied some US businesses market access and forced other US businesses to reduce activities in China."