The plan is being worked on by more than 20 universities across China.
Satellites will fire powerful lasers towards the sea, which will send pulses back when they hit any object, such as a submarine, allowing its location to be determined.
This should work for objects up to 1,600ft (500m) below sea level.
Chinese researcher Song Xiaoquan claimed the project “will chance almost everything”.
He added it would make large parts of the sea “more or less transparent”.
However, Mr Xiaoquan was unsure when the project would be completed.
Researchers claim the satellite’s laser beam will be powerful enough to scan an area up to 62 miles across.
They also claim the beams could be one billion times brighter than the sun.
The scheme has been given the name Project Guinean, meaning “watching the big waves”.
It was launched back in May at the Pilot National Laboratory in Qingdao, a city in Shandong province.
It is anticipated the satellites will be used alongside microwave radar, which can be used to scan the sea’s surface for objects.
However, not everybody is convinced the project will work.
One researcher told the South China Morning Post: “They won’t be able to break through the darkness guarded by mother nature.
“Unless of course they are Tom Cruise, armed with some secret weapons”.
China is undergoing an ambitious programme of military expansion.
It raised its planned defence spending for 2018 alone by 8 percent compared to 2017 figures.