China's military carried out war games in the disputed South China Sea this week, with warships, submarines and fighter jets simulating cruise missile strikes on ships, the official People's Liberation Army Daily said on Friday.

China claims almost all of the energy-rich waters of the South China Sea, through which more than $5 trillion of maritime trade passes each year. The Philippines, Brunei, Vietnam, Malaysia and Taiwan have overlapping claims.

The U.S. Pacific Fleet Commander on Monday warned of a possible arms race in the disputed South China Sea which could engulf the region, as nations become increasingly tempted to use military force to settle territorial spats.

In a front page story, the newspaper said the drill was carried out on Wednesday across "several thousand square kilometers" of waters somewhere in the South China Sea.

The forces were split into two teams, red and blue, as military commanders threw various scenarios at them, including an accidental missile strike on a commercial ship operated by a third party, the paper said.

The warships also simulated deflecting anti-ship missile attacks, and operating in concert with submarines, early warning aircraft and fighter jets, the report added.

China periodically announces such exercises in the South China Sea, as it tries to demonstrate it is being transparent about its military deployments.

On Sunday, the Defense Ministry said the navy had recently carried out drills in the South China Sea. It was not clear if the exercises referred to by the newspaper and these drills were the same.

China has been at odds with the United States of late over the strategic waterway.

Washington has criticized Beijing's building of artificial islands in the South China Sea's disputed Spratly archipelago, and has conducted sea and air patrols near them.

Last month, U.S. B-52 bombers flew near some of China's artificial islands and at the end of October a U.S. guided-missile destroyer sailed within 12 nautical miles of one of them.

China expressed concern last week about an agreement between the United States and Singapore to deploy a U.S. P8 Poseidon spy plane to the city state, saying the move was aimed at militarizing the region.