China’s South China Sea policy in recent years has been marked by a mix of maritime assertiveness and economic-diplomatic inducement. This article argues that this contradiction is a result of both structural drivers and domestic imperatives. Structurally, the perceived opportunity after the global financial crisis and later, the perceived risk of a US-led encirclement after Obama’s “rebalancing to Asia” strategy have both pushed China to take a more hard-line approach to maritime disputes. However, the necessity to avert regional backlash has, on the other hand, compelled Beijing to counteract its maritime moves with active economic and diplomatic statecraft to reassure its smaller neighbours, albeit with mixed effects. Domestically, the contradiction is rooted in the ruling Communist Party of China elites’ needs to strike a balance between their different pathways of legitimation: while nationalist legitimation necessitates China to assert its sovereign rights, performance legitimation requires it to pursue a cooperative regional strategy via the “Belt and Road Initiative” so as to preserve a stable and productive environment needed for sustained domestic growth.