But since the start of last year, China's powerful dredges and pumps have built it into an island of more than five square kilometres, complete with an airstrip and a widened lagoon mouth that signals possible use as a naval base.

The new island in the Spratly archipelago lies more than 1100 kilometres from China but only 239 kilometres from the Philippines, putting it inside the smaller country's exclusive economic zone.

If China were to abide by the Permanent Court of Arbitration tribunal's damning judgment this week, it would dismantle its airstrip and infrastructure on Mischief Reef and vacate the area, preferably even returning the reef to its original state.

Instead, it landed a plane on the new airstrip on Wednesday in what Chinese media called a test flight. Beijing also threatened to declare an air defence identification zone over the sea, a move that would escalate tensions, and declared thunderously it would disregard the tribunal's finding.

The predictability of Beijing's riposte hasn't detracted from the resounding sense that this is a line-in-the-sand moment. The fact that The Hague tribunal's ruling was more emphatic in its savaging of China's stance than observers expected makes it all the more unavoidable as a test of whether Beijing can be persuaded to live by the international system of rules at the expense of its clear determination to dominate its nearby waters as a regional hegemon.

A region that has watched China build and militarise its sandcastles with growing anxiety is now asking itself how it can dial down the tension without letting Beijing off the hook. Can diplomacy and negotiation still persuade Beijing to step back and follow the rules, or will a bit more pressure need to be applied? And can the region come together to apply that pressure without backing Beijing into a corner and forcing it to flex its muscles?

Australia is very much in the game. Foreign Minister Julie Bishop has avoided making any kinds of threats, preferring instead to remind China that its own interests are overwhelmingly served by obeying the rules.

"Nations cannot dismiss or flagrantly violate such a clear articulation of international law without suffering enormous reputational costs," she told Fairfax Media.

"We recognise China has legitimate ambitions to assume its place as a regional and global leader but leadership requires acquiescence to other powers, and the way China responds to the ruling and with respect to advancing its claims in the South China Sea more generally will determine how acceptable Chinese leadership will be for the region," she said.

She added that as a still-developing economy, China needs the rules-based stability that have allowed its stellar growth so far. Asked what China actually needed to do to demonstrate its acceptance of the ruling, she said it should halt its land reclamation and militarisation of the islands and conduct peaceful negotiations with rival claimants to the disputed territories.

But many analysts regard that as hopeful. China wasn't going to "pack up and go away", said Ashley Townsend, a research fellow with the US Studies Centre at the University of Sydney.

It might moderate how it pushes away other countries' boats that approached its artificial islands, but it was "not clear how China will respond" if say Filipino fishermen started working in sensitive areas.

At the muscular end of the spectrum, Labor's Stephen Conroy called for Australia to carry out "freedom of navigation operations" that would challenge China, essentially daring it to threaten Royal Australian Navy ships that deliberately sail through the claimed 12-nautical-mile maritime territory.

Bishop branded Conroy's remarks "irresponsible and reckless". But Conroy is hardly in the wilderness, with many influential experts agreeing that diplomacy needs to be backed up by actual demonstrations that regional powers will oppose China's attempts to control the waters in deed as well as word.

Richard Fontaine, president of the Centre for a New American Security and former adviser to US senator and one-time presidential candidate John McCain said he expected the US to carry out such patrols – it has done at least two in the past year – and added it would be a "welcome thing" if Australia did the same.

But beyond gestures of strength by individual countries, what's needed above all is for the region to get behind the rules-based system in a unified way, Fontaine and others said.

It's hard to be a leader if nobody actually wants to follow you. Whereas the US has friends and allies across Asia, who are now turning even closer to it, China has at best tamed Cambodia and Laos on the South China Sea issue. US strategy would be to quietly assemble the rest of Asia into a reasonably unified position, Fontaine said.

"This seems to be precisely what China fears the most, which is a unified regional response and opposition … that would then isolate it."

The Association of South East Asian Nations meeting later this month, which Bishop will attend, will be crucial in knitting together such unity.

There is also the possibility that China and the Philippines can negotiate a resolution. The new Philippine President Rodrigo Duterte appears more willing to negotiate that his predecessor.

Some experts even see promise in China's response. Andrew Chubb, a China expert at the University of Western Australia, said a close reading of the statement issued by Beijing in response to the ruling in fact contained some subtle adjustments that gave cause for optimism.

In one of its most significant rulings, the tribunal dismissed China's "nine dash line", the 1947 demarcation that China has long implied gives it historic rights over most of the South China Sea and everything within it – the water, the fish, the petroleum reserves, everything.

"[The statement] made reference to the nine dash line under the territorial claims section. It did not link it to any historical or maritime rights. That implied that the correct reading of the nine dash line is that it depicts the area in which China claims the islands rather than … that it covers historic maritime rights everywhere within the nine dash line," he said.

If this is reflected in the behaviour of Chinese maritime agencies on the water, Chubb said, it is a hugely important shift if Beijing is indeed crabwalking towards acknowledging its maritime claims are generated only by ownership of rocks and islands – as per the United Nations Convention on the Law of the Sea – rather than carte blanche ownership of the lot.

But balanced against that optimism, China's leaders even if they want to compromise have put themselves in a difficult position, said Townsend of the US Studies Centre.

"China has really backed itself into a corner in drumming up a very strong, nationalist line over the past couple of years on the South China Sea on historic rights and indisputable sovereignty. This is not just an expedient tactic. People in China genuinely believe that the South China Sea has been essentially stolen from them through the century of humiliation and it's a highly emotional and emotive issue in China."

There is a perfectly calibrated goldilocks response out there somewhere – neither too hot nor too cool.

It will be shaped by what China does next. The situation  is fluid and will require deftness from countries such as Australia. It's worth remembering that, fraught as it is, the fallout from The Hague ruling is only a first step – it is about how countries behave at sea, not about the actual territorial claims themselves. Those disputes have been going on for decades and will go on for decades more.

The Hague ruling told China in no uncertain terms that its artificial islands don't give it any legal rights over the surrounding waters and, in the case of Mischief Reef, actually encroaches on another country's rights.

As China expert Linda Jakobson of the US Studies Centre put it this week, the goal at the moment is putting a brake on rising tensions stemming from the sovereignty disputes. "We are not going to see a solution on the question of sovereignty … These disputes will continue long after I'm no longer alive."

The difference from previous decades is that, as Asia and particularly China grows stronger in wealth and military power terms, the stakes are getting higher.