China has declared its establishment of a municipal settlement on a disputed island chain in the South China Sea. The move, combined with an earlier announcement about the islands' militarization, further raises tensions in this geopolitical hot spot

Hou Jiansen / Xinhua / ZUMAPRESS A ceremony is held on July 24, 2012, to mark China's establishment of Sansha, a city on Woody Island in the disputed Paracels archipelago

Sansha, China’s newest city, would seem to be a paradise. It has tropical waters, about 2 million sq km and just 3,500 permanent residents on 13 sq km of palm-covered islands. There’s an airstrip but no airlines yet, so transportation is still largely relegated to a 17-hour boat trip. But perhaps the biggest drawback is that it sits in the South China Sea, where rival territorial claims have intensified in recent months. On Tuesday, Sansha established a prefecture-level municipal government, and China’s People’s Liberation Army (PLA) says it will soon establish a military garrison there. Sansha is the tiniest city of its kind in China, but it is having an outsize impact on the country’s increasingly tense territorial disputes with some of its Southeast Asian neighbors.

(MORE: South China Sea Disputes: Is This How War Starts?)

China and Taiwan both claim almost all of the 3 million-sq-km South China Sea, and the Philippines, Vietnam, Malaysia and Brunei have partial claims. All except Brunei occupy disputed islands and reefs in the sea. The possibility of rich, undersea oil and gas resources has led to increasing conflict between the neighboring states, and analysts say China’s new city will only worsen the disputes. “All trends are in the wrong direction,” says Ian Storey, a senior fellow at the Institute of Southeast Asian Studies in Singapore. “The claimant countries have hardened their positions on jurisdictional claims. That’s made a legal resolution or a negotiated settlement harder because there’s less room for compromise.”

The dispute roiled the Association of Southeast Asian Nations foreign-ministers meeting in Cambodia that took place July 9–13. It failed to agree on a concluding joint statement for the first time since the group was founded in 1967. While the Philippines and Vietnam pushed for adding the South China Sea standoff to the statement, China’s ally Cambodia balked at including the issue, which China says it wants to resolve in bilateral discussions with each claimant rather than in a multilateral forum.

In April, the Philippines’ largest warship, the World War II–era frigate Rajah Humabon, confronted Chinese fishing boats it accused of harvesting endangered species near the Scarborough Shoal, which China calls Huangyan Island and the Philippines the Bajo de Masinloc. China sent marine surveillance vessels, and the Philippines soon replaced its warship with coast-guard craft, resulting in a standoff that still festers. The Philippines says it recalled its ships, but Chinese vessels remain near the shoal. “If someone entered your yard and told you he owned it, would you agree?” Philippine President Benigno Aquino said in his annual state of the nation address on Monday. “Would it be right to give away that which is rightfully ours?”

(MORE: Can Aquino’s China Visit Ease Tensions?)

Many Southeast Asian states are beefing up their armed forces in response to China’s new assertiveness. Last year the military budget for the Philippines, one of the weakest military powers in Asia, nearly doubled. That means increased risk in the South China Sea, according to a report released Tuesday by the International Crisis Group, a Brussels-based think tank. “While increased military power is likely to raise the threshold for, as well as cost of, armed conflict, it could also embolden countries to be more pro-active in their territorial claims, making skirmishes harder to resolve,” the report said. “There is a risk that in seeking to flex their military muscle, claimant states will engage in brinkmanship that could lead to unintentional escalation.”

The Philippines and Vietnam both protested China’s creation of Sansha. China announced the move on the same day that Vietnam issued a law declaring the Paracels and Spratlys to be in its jurisdiction. China, which took control of the Paracels after a brief war with South Vietnam in 1974, established Sansha’s government on the largest Paracel isle, Woody Island. Also known as Yongxing in Chinese, the island has a grocery store, hospital, library and karaoke parlor but as yet no kindergarten, according to reports of Chinese journalists who have visited. Yongxing will likely be the headquarters of a new PLA garrison, though few details have been revealed. “This pronouncement of a garrison is symbolic,” says Rory Medcalf, director of the international security program at the Lowy Institute for International Policy in Sydney. “It may take a long time to operationalize, but it is placing a firm military marker on China’s claim in the South China Sea.”

The disputing parties have often used paramilitary and civilian forces such as coast guard and fisheries enforcement agencies to defend their territorial claims. The move to establish a Sansha garrison, though, is a sign of the growing reliance on hard power. Another indicator was the July 11 grounding of a Chinese navy frigate on Half Moon Shoal, which is claimed by both China and the Philippines. Perhaps more surprising than the initial presence of the Chinese navy ship just 100 km off the Philippines’ Palawan province was the speed with which it received assistance from its compatriots. “In about 24 hours they got five ships, including a tugboat, to Half Moon Shoal, and that’s quite a way from China,” says Storey. “That goes back to the point of increasing militarization. These warships were clearly on patrol or somewhere in the area.”

For now, the most significant impact of Sansha may be to increase the importance of the conflict for average Chinese citizens. In recent weeks Chinese media have run personalized stories of reporters visiting the islands. “Both the city and the garrison unfortunately raise the emotional stakes for Chinese people,” says Medcalf. “That makes compromise even harder.”