The 184-page report sponsored by the U.S. Congress-mandated U.S.-China Economic and Security Review Commission
and prepared by the Rand Corporation, says the People's Liberation Army has made rapid progress in a short time.
However, weaknesses in its organizational structure -- including corruption among its ranks -- and in its combat capabilities mean it faces serious challenges.
"These shortcomings could limit its ability to successfully conduct the information-centric, integrated joint operations Chinese military strategists see as required to fight and win future wars," the report said.
Shortcomings in its combat capability include logistical weaknesses. In particular, the report says that China lacks the "amphibious lift" -- the ability to transport enough forces and military assets -- for an outright invasion of Taiwan.
China's navy has not fully mastered anti-submarine warfare, the report said, adding that it is experiencing problems integrating complex modern weaponry with existing equipment. The report said it also lacks the necessary trained personnel to operate this weaponry.
Its air force, meanwhile, is grappling with limited numbers of special-mission aircraft and a fleet that comprises multiple generations of planes.
China's Ministry of Defense did not immediately respond to a request for comment.
'Riddled with corruption'
The 2.3-million-strong PLA is "riddled" with corruption, the report said, because of a major lack of external oversight --- the only civilian in the chain of command is President Xi Jinping.
Xu Caihou, a top retired general, recently confessed to taking bribes
and it's widely believed that promotions and positions can be bought.
And among lower ranks, reports of officers selling military housing and using military plates to avoid speed limits, highway tolls and parking restrictions are widespread.
The report also said that low pay, and a lack of realistic training exercises -- exercises are seen as failures if the PLA loses -- present further challenges, as do the skills of its recruits.
Most are still drawn from rural areas with limited education although there is a push to recruit more college graduates.
Moreover, China's "one-child" policy, which has created the "little emperor" phenomenon of spoiled children produces recruits who "may not be tough enough to withstand military discipline," the report added.
But the PLA is well aware of its shortcomings, the report said, with military publications and Chinese sources suggesting that "there is still a large gap between China and developed countries' militaries, especially the United States."
The report concludes that U.S. military planners need to understand China's incomplete military transformation so they can ensure the U.S. and its allies can deter China from using force or the threat of force to resolve disputes with its neighbors.