The South China Sea is subject to competing claims of sovereignty by the littoral states. Due to the number of claimants and the complexity of claims, it is called the 'mother of all territorial disputes'. China is far the biggest country in the region and claims sovereignty over almost all the South China Sea. This Working Paper elaborates the claims and considers the implications for China's neighborhood relations and the alignments in the Asia-Pacific. The focus is on two faces of power in China's policy, military power and soft power, after China's seizure of Mischief Reef in 1995 that upset its neighbors. China attaches great weight to developing good neighborhood relations and has become an advocate of soft power. However, when it concerns the South China Sea the soft power approach is combined with a continuing use of military power to strengthen its position. It is concluded that the two faces of power present China with new unwieldy challenges.