Vietnam is obviously closer to Nansha Archipelago than China. But if you measure the map you will find that the closest distance from Vietnam to the middle of the Nansha A. is around 300 miles or 500 km. The distance from the middle of Xisha A. to the middile of Nansha A. is around 400 miles or 650 km. Therefore, Vietnam is closer to Nansha than China by only some 150 km. (Actually, if you look at the northern part of Vietnam, it is much farther away from Nansha than Hainan. It is only the part of Vietnam that is south of Xisha that is closer to Nansha than China. Therefore, if Vietnamese fighters have to come from Vietnamese air bases that are north of Xisha than they are actually farther away from Nansha than Chinese air bases.) For a J-10 flying at Mach 2 or 2,500 km/h, the difference in time is only 3.6 minutes. Therefore, once China has established a few air bases on the Xisha A. then its distance to Nansha A. is almost the same as the distance from Vietnam to these islands. Even if the fighters/bombers have to come from Hainan the distance is only 600 miles or 1,000 km. For J-10 fighter whose combat radius is 1,600 km with in-flight refueling this is no problem. Even without in-flight refueling a J-10 can effectively take off from Xisha Is. and patrol Nansha A. almost the same as a Vietnamese fighter. Therefore, it is not correct to say that the distance would make it impossible for China to effectively patrol the Nansha A.
The cost of fighting Vietnam is not very much. Vietnam may have millions of soldiers. But it has very few fighters or naval battleships. Therefore the cost of fighting Vietnam is only some 30 to 50 J-10. The cost of replacing 50 J-10 is around 7.5 billion yuan. Vietnam has no powerful naval ships now. But it will be getting 6 submarines in 2012-2016 and at least 2 frigates in 2011 to 2012. The frigates are no problem since China can blow them out of the water easily with its DF-21 missiles. But the submarines will be a bigger problem though I expect they can be destroyed in port with missiles. Therefore, the worst case scenario in fightig Vietnam is losing 50 J-10 fighters. But if Vietnamese fighters can be destroyed on the ground by cruise missiles guided in by UAV or unmanned planes then the loss in fighters can be minimized. Therefore, the cost of fighting Vietnam is only around 10 billion yuan at the most. But China has more than $3 trillion in forex reserve or almost 20 trillion yuan. Vietnam has practically no forex reserve and cannot keep buying many fighters or frigates to replace its losses. So the cost to China is minimal while the cost to Vietnam is unsustainable. In the end, the profit from oil will be some $3 trillion or more figuring 30 billion barrles of oil at $100 per barrel. So China can easily get back the expenses of fighting Vietnam. And Vietnam will quickly go broke and will not be able to continue fighting.
There is no need to fight Taiwan. Taiwan isn't going anywhere. And Taiwan is also willing to share the oil through joint development. So there is no need to fight Taiwan. In fact, Taiwan can be a partner to fight Vietnam and the Philippines.
As to China's economic development, it simply will not be affected by war in the S. China Sea. Vietnam and the Philippines don't do that much trade with China. While China can easily ignore its lost trade with Vietnam and the Philippines, they will suffer heavy losses proportionately since China's economy is some 30 times bigger than the Philippines economy and 60 times bigger than the Vietnamese economy. And the cost to China in replacing fighters and missiles is minimal. Furthermore, China is giving a lot of loans to Vietnam. Stopping these loans will more than enough to pay for the war.
I have not mentioned the Philippines because just one missile will sink the Filipino flag ship and the war with the Philippines will be over.