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It's China vs. the US at sea — and for Beijing, it's personal

Tensions between the United States and China continue to escalate in the South China Sea, with freedom of navigation in one of the world's most critical maritime passages potentially at stake.

Zhou Xiaozhou, deputy commander of Chengdu Military Area Command, salutes soldiers during a rally before a mission on the border with Vietnam last year.
Meng Zhubin | VCG | Getty Images

With no resolution in sight, both sides are ramping up their military capabilities in the massive body of water, potentially including nuclear weaponry and anti-ballistic missiles.

"This has become a military contest between China and the U.S.," said Jennifer Harris, former member of the policy planning staff at the U.S. Department of State and a foreign relations expert.

The so-called nine-dash line that China has drawn over most of the South China Sea — a gargantuan territorial claim that stretches about 1,200 miles from its shores — would give Beijing control over a zone that's estimated to handle about half of global merchant shipping, a third of the planet's oil shipping, two-thirds of global liquid natural gas shipments, and more than a tenth of the Earth's fish catch. Most nations in the region are dependent on the free flow of goods through the body of water. Japan and South Korea, for example, receive the vast majority of their Persian Gulf oil through the South China Sea.

For the United States, the conflict is geopolitical and a way to portray U.S. supremacy in the Pacific while also exercising — and enforcing — long-running international laws that pertain to navigational freedom for every nation's ships.

For China, it's personal. While the 20th-century war with Japan may seem like a distant memory to many in the Western world, the Chinese continue to reference that conflict as one of the worst periods in China's history — one from which wounds to national pride still have not healed.

"A lot of drama has been left behind from the war with Japan," said Fu Ying, chair of the foreign affairs committee of China's National People's Congress in Beijing. As a result, China is less willing to back down now when it feels its territorial claims are at stake.

South China Sea dispute escalates

Officials in China, with whom CNBC interacted extensively over the course of May, still exhibit strong emotion over the very painful period of death and misery during the Japanese invasion in the 1930s. It is perhaps one of the reasons China has taken a hard-line approach to the South China Sea dispute. One Chinese official told CNBC that losing territory on President Xi Jinping's watch could seriously damage his popularity among Chinese citizens. Academic observers seconded that observation, noting that China is loathe to give up land and sea holdings.

"The last time China gave up territory by force was the 1895 Treaty of Shimonoseki," said Xue Chen, research fellow at the Shanghai Institutes for International Studies. "As the outcome of the first Japanese-Chinese War, China ceded Taiwan, the Pescadores and all subsidiary land features to Japan."

Furthermore, the timing of the ongoing flare-up comes at what's already a difficult period for China. The leadership in Beijing is under immense pressure to turn around its ailing economy. Pressure building in the South China Sea just adds one more worry to Xi's list.

A combination of those factors will fuel an aggressive and bold approach by its military, experts in Beijing and Shanghai said. Speculation is rising that China is already evaluating sending nuclear submarines to the region.

"All activity (so far), whether military actions, harassing the fishing boats of other countries, or constructing artificial islands, has been undertaken in such a way as to keep tensions just below the threshold that would trigger outright interstate war," said Andrew Scobell, senior political scientist and author of "China's Search for Security."

Not only the United States, but also Vietnam, the Philippines and Indonesia are increasingly at odds with China over maritime operations in the South China Sea. Last week, an Indonesian naval frigate opened fire on a Chinese fishing vessel and took its crew into custody after allegedly catching the boat operating illegally in Indonesian waters. Such incidents are becoming more common over the last few months.

The question confronting leaders is this: What event or provocation will warrant an aggressive response?

Officials are closely watching a decision that's due from The Hague in the coming weeks on an appeal from the Philippines regarding a claim on islands in the South China Sea.

An adverse decision or outcome for China could push Xi's regime to "declare an ADIZ (Air Defense Identification Zone) in the South China Sea — just as it did in the East China Sea back in November 2013," said Harris.

She said this would essentially entail China drawing lines in the air mirroring the same maritime lines it has drawn in the South China Sea waters below.

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Another factor that could push China to assert itself more generally is the U.S. deployment of a THAAD (Terminal High Altitude Area Defense) anti-ballistic missile system close to South Korea. While the main objective of this deployment would be to protect its ally from North Korea, experts say China would see this as a great threat.

"The Chinese believe — wrongly — that the use of a THAAD would compromise their nuclear deterrent capability," said Evan Medeiros, head of Asia research at Eurasia Group and previously President Barack Obama's top advisor on Asia-Pacific affairs.

"The deployment of a THAAD in South Korea would be significant because it would open a new source of tensions in China-South Korea relations," added Medeiros. South Korea does not border the South China Sea.

The onus is now on leaders in China, neighboring ASEAN countries and the United States to engineer a solution that will likely involve compromise from all nations involved. Political strategists will be watching for developments out of the U.S.-China Strategic and Economic Dialogue in Washington next week.

"The risk of disruption comes from how hard the U.S. is willing to press the issue, and how central the islands are to its geopolitical agenda — something U.S. diplomats are well aware of," said China expert Gilliam Collinsworth Hamilton, head of NSBO's Beijing office.

CNBC's Everett Rosenfeld contributed to this report.