Tensions flared most recently last week when the Chinese government announced it would begin developing high-end tourism on a few of the Paracels as part of an ambitious new plan to draw tourists from around the world to Hainan, a Chinese island province off the mainland's southern coast. But while planners dream of creating a Chinese Hawaii — with the Paracels' clear waters a potential luxury destination for divers — the leaked proposal made Hanoi bristle almost instantly. China has retained de facto control over the archipelago since seizing it in its entirety with gunboats in 1974, but Vietnam has stubbornly clung to its long-standing territorial claims over the archipelago. On Jan. 4, a Vietnamese Foreign Ministry spokesman said the possibility of Chinese tourists snorkeling around a Paracel cove "seriously violates Vietnam's sovereignty." Chinese officials dismissed the Vietnamese protests, saying the matter was purely one of China's own economic development.

The spat may be a minor compared to incidents in the past — the two countries fought a bloody border war in 1979, and in 1988 a naval battle near the Spratlys left 70 Vietnamese sailors dead. But it comes amid a steady buildup of Chinese might in the region. Ralf Emmers, an expert on the South China Sea and associate professor at the S. Rajaratnam School of International Studies in Singapore, says the Chinese tourism gambit is a move "to make its sovereignty claims over these islands a fait accompli." Vietnam watchers point to an escalation of tensions since the 2007 completion of a strategic Chinese submarine base on Hainan Island, just over 124 miles (200 km) from Vietnam's eastern shore. The base has enabled Beijing to project its power not only in its own backyard, but further into the Pacific and Indian oceans as well. Last year, China detained 25 Vietnamese fishermen found near the Paracels, who were released only after weeks of demonstrations in Vietnam. Chinese officials also allegedly pressured multinational oil companies to eschew tying up deals with Hanoi to explore for resources in the South China Sea, or, as Vietnam calls it, Bien Dong (East Sea). (See pictures of the China-Vietnam border war.)

Vietnamese prickliness at what many see as Chinese encroachment has led to Hanoi beefing up its own naval capabilities. Last month, it penned a landmark $2 billion deal with Moscow to acquire six Kilo-class Russian submarines. The government is also formulating plans to improve its coastal-defense operations and to better protect Vietnamese fishing fleets. Still, considering China's size and wealth, there's little talk of an arms race in the region. "Vietnam is subject to the tyranny of geography. It's like a mid-sized Chinese province," says Carl Thayer, an authority on the Vietnamese military at the Australian Defence Force Academy. "If the elephant really decides to move, the Vietnamese will be squashed."

Open conflict, of course, is unlikely given the scale of economic integration in Southeast Asia. Sino-Vietnamese relations in most arenas are as robust as they've ever been. But observers are concerned that governments have yet to come up with an effective way to arbitrate this maritime dispute. In 2002, China signed a code of conduct with the Association of Southeast Asian Nations (ASEAN), of which Vietnam is a member, pledging to refrain from activities that would destabilize the fragile status quo in the South China Sea. Few parties have kept to the spirit of the agreement. The Spratlys, an island chain far larger than the Paracels, are claimed by China, Vietnam, the Philippines, Malaysia, Brunei and nominally by Taiwan, and resemble a Risk game board with territories grabbed pell-mell over the years in a scramble for land and influence. Malaysia has set up a diving resort on one of its own reefs, while most other nations have military posts on their islands. "The ASEAN model has been more or less useless," says Simon Shen, a professor of international relations at the Chinese University of Hong Kong. "The official discourse is [for claimant nations] to co-develop [the islands], but this is almost impossible given the nationalism the dispute inspires."

In China and Vietnam, in particular, nationalist netizens have pressured their governments to remain firm on issues of sovereignty. Both sides have dredged up archival evidence supposedly linking these clusters of uninhabited rocks in the sea to the glories of ancient dynasties and Emperors. For Hanoi, the matter has become especially sensitive as an array of dissidents — from Buddhist monks to activists protesting bauxite-mining — have taken up the cause of the archipelagoes, accusing the ruling Communist Party of selling out to China with every act of acquiescence. "The Vietnamese leadership is burning a candle on both ends," says Thayer. "They have to balance the reality of the situation against rising national sentiment and hope they don't get burned."

Walking such a precarious tightrope means Hanoi — as well as other governments claiming the Spratlys and the Paracels — have to measure their actions carefully. "The real risk in the South China Sea," says Emmers, "is that of a miscalculation that could lead to skirmishes and a clash of arms." As signs of meaningful cooperation are few, most expect this tacit consolidation of interests — including China's economic expansion into the Paracels — to continue. How this chess game plays out may have broader ramifications as the Chinese military extends its clout and influence in the coming decades. "It's an interesting showcase for what the future of Chinese naval power may look like," says Emmers. "And not just in the South China Sea."