"Aside from deploying defensive weapons on the, China should build a powerful deterrence system, including an aerial base and a roving naval force and base", the paper said.
In May, China said it had for the first time landed bombers on Woody Island in the Paracel Islands, prompting U.S. warnings that it was destabilising the region.
China has been building small islands and other maritime features into military facilities there. "In the speech, Mattis laid out the broader US strategy for a "free and open" Indo-Pacific region".
Mattis said the Trump administration's recent decision to disinvite China from a multinational naval exercise this summer was an "initial response" to Beijing's island activity.
"The US will continue to pursue a constructive, results-oriented relationship with China", Mattis said, "competing vigorously where we must".
Specifically, the Pentagon chief mentioned China's deployment of anti-ship and surface-to-air missiles, electronic jammers, and the landing of a bomber aircraft at the Paracel Islands off the coast of Vietnam.
Mattis said any discussion about the future of 28,000 USA troops now stationed in South Korea "will be separate and distinct from the negotiations" with North Korea.
China has indisputable sovereignty over the islands in the South China Sea and the adjacent waters, a fact verified by historical evidence and supported by worldwide law, he said.
Despite frequent warnings from Washington about China's rising might and the pitfalls of its "Belt and Road" global infrastructure initiative, Beijing has faced few consequences for its South China Sea build-up and sweeping territorial claims.
China's deployment of defensive facilities on its islands in the South China Sea is a legitimate right granted to sovereign states by worldwide law, which has nothing to do with militarization and does not pose a threat to regional security, he said.
He said the United States remained committed to ensuring free and open transit in the region, a hub for shipping and natural resources beset by overlapping claims from China and several of its neighbors including Vietnam and the Philippines.
Speaking at the annual Shangri-La Dialogue, an Asian security summit in Singapore, Mr Mattis said China's actions were created to intimidate and coerce other nations in the region.
US officials are also pushing worldwide allies and partners to increase their own naval deployments through the vital trade route as China strengthens its military capabilities on both the Paracel and Spratly islands, the diplomats said, even if they stopped short of directly challenging Chinese holdings.
The US wanted complete denuclearisation of the Korean peninsula, he added.
James Mattis said China's actions in the region stood in "stark contrast" to the United States policy of openness and called into question China's goals.
"We see any other country that tries to make noise about this as interfering in our internal affairs", General He added.
Speaking at the same conference, China's Lt Gen He Lei said: "Any irresponsible comments from other countries can not be accepted".
Mattis said little about North Korea in his speech, which came just hours after Trump said that the June 12 talks in Singapore with the North's leader, Kim Jong Un, were back on.