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Abstract: The South China Sea (SCS) interocean circulation and its associated heat and freshwater budgets are examined using the results of a variable-grid global ocean model. The ocean model has a 1/6° resolution in the SCS and its adjacent oceans. The model results from 1982 to 2003 show that the western Pacific waters enter the SCS through the Luzon Strait with an annual mean volume transport of 4.80Sv, of which 1.71Sv returns to the western Pacific through the Taiwan Strait and East China Sea and 3.09Sv flows toward the Indian Ocean. The heat in the western Pacific is transported to the SCS with a rate of 0.373PW (relative to a reference temperature 3.72°C), while the total heat transport through the outflow straits is 0.432PW. The net heat transport out of the SCS is thus 0.059PW, which is balanced by a mean net downward heat flux of 17W/m2 across the SCS air–sea interface. Therefore, the interocean circulation acts as an “air conditioner”, cooling the SCS and its overlaying atmosphere. The SCS contributes a heat transport of 0.279PW to the Indian Ocean, of which 0.240PW is from the Pacific Ocean through the Luzon Strait and 0.039PW is from the SCS interior gained from the air–sea exchange. The Luzon Strait salt transport is greater than the total salt transport leaving the SCS by 3.97Gg/s, implying a mean freshwater flux of 0.112Sv (or 3.54×1012 m3/year) from the land discharge and P−E (precipitation minus evaporation). The total annual land discharge to the SCS is estimated to be 1.60×1012 m3/year, the total annual P−E over the SCS is thus 1.94×1012 m3/year, equivalent to a mean P−E of 0.55m/year. The SCS freshwater contribution to the Indian Ocean is 0.096Sv. The pattern of the SCS interocean circulation in winter differs greatly from that in summer. The SCS branch of the Pacific-to-Indian Ocean throughflow exists in winter, but not in summer. In winter this branching flow starts at the Luzon Strait and extends to the Karimata Strait. In summer the interocean circulation is featured by a north-northeastward current starting at the Karimata Strait and extending to the Taiwan and Luzon Straits, and a subsurface inflow from the Luzon Strait that upwells into the surface layer in the SCS interior to supply the outward transports. [Copyright &y& Elsevier]