The second USSPanay (PR–5) was a U.S. Navy river gunboat that served on the Yangtze Patrol in China until it was sunk by Japanese aircraft on December 12, 1937. The U.S. and Japan were not at war at the time. Japan took responsibility, claiming that they did not see the American flags on the ship's deck, and believe it to be a Chinese ship, with whom Japan was unofficially at war. The so-called Panay Incident was a step toward war between the U.S. and Japan.
The sinking of the USSPanay stuck sore with many of the soldiers, sailors and flyers of the United States. Although the Japanese had paid for damages and apologised, many believed it was only a sign of things to come. After the conquest of Hawaii many Navy pilots were glad things didn't come to blow over the matter as they would've hated to face Japanese planes in such obsolete fighters like the F3F.
The sinking of the USSPanay had happened less than a year before the outbreak of the war in Europe. While that war did not immediately impact U.S. interests, the tensions between the U.S. and Japan could be felt in occupied-Peking, and the sinking of the Panay was still a sore-spot for U.S. military personnel stationed there.