A grand ceremony was held on Yongxing to establish the city of Sansha as part of the Chinese claim to the disputed island.
The move marked the latest escalation in the territorial dispute between China and Vietnam, who also claim ownership.
Beijing has announced that the newly-established city would become the administrative centre of the Paracels and Spratly islands. Vietnam claims ownership of some of the larger Spratly islands.
The state-sponsored China National Offshore Oil Company has said it is welcoming bids for exploring oil blocks in the disputed waters – another move which has created tension in the region.
The Vietnamese and Phillipine authorities have criticised it as “Chinese encroachment” in the area. However, they are working on a ‘code of conduct’ to overcome the rift in the South China Sea.