He told an international security conference that its failure to resolve disputes with other nations threatens east Asia's long-term progress.
Hagel said the US "will not look the other way" when nations such as China try to restrict navigation or ignore international rules and standards.
For the second year in a row, he used the podium at the Shangri-La conference in Singapore to criticise China for cyberspying against the US.
His remark came two weeks after it charged five Chinese military officers with hacking into US companies to steal trade secrets.
In response, the Chinese suspended participation in a US-China cyber working group, and released a report that said the US is conducting unscrupulous cyber espionage.
Hagel, in his speech, said the US will continue to raise cyber issues with the Chinese, as "dialogue is essential for reducing the risk of miscalculation and escalation in cyberspace". He said the US opposes the use of intimidation or threat of force to assert territorial claims. "All nations of the region, including China, have a choice: to unite, and recommit to a stable regional order, or, to walk away from that commitment and risk the peace and security that has benefited millions of people throughout the Asia-Pacific, and billions of people around the world," he said.
China and Japan have been at odds over uninhabited islands in the East China Sea that are controlled by Japan but claimed by both.
The US has declined to take sides on the sovereignty issue but made clear it has a treaty obligation to support Japan. The US has also refused to recognise China's declaration of an air defence zone over a swath of the East China Sea, including the disputed islands.
His remarks drew a challenge from Major General Yao Yunzhu of China's People's Liberation Army, who questioned if the US and its allies followed international law when they set up air defence zones.
US officials have raised concerns about Beijing's decision to plant an oil rig in part of the South China Sea also claimed by Vietnam. The move has led to a series of clashes between the nations in the waters around the rig.