Clouds gather over the Dome of the Rock, located on the compound known to Muslims as Noble Sanctuary and Jews as Temple Mount, in Jerusalem's Old City. Reuters

U.S. President Donald Trump's decision to recognize Jerusalem as Israel's capital and relocate the U.S. embassy there would spark conflicts, which in turn would disrupt its investment plans in the region, South China Morning Post reported on Thursday.

Beijing has extensive economic and military relations with Israel, but also maintains close ties with Palestine, the report said citing diplomatic observers.

China's foreign ministry spokesman Geng Shuang said on Wednesday that President Donald Trump's plan would trigger an escalation in tensions.

China supported the Palestinians in building an independent and fully sovereign state, taking the 1967 borders as the basis and with East Jerusalem as its capital, Geng said.

China and Israel established diplomatic relations only in 1992, but the two had begun military cooperation in 1979, the report said.

Trade between the two countries has accelerated rapidly since the start of the millennium, rising to US$11.4 billion in 2015 from just US$1.1 billion in 2000. China is now Israel's third-largest trading partner after the US and the European Union, and its second-largest export destination, according to the report.

Jerusalem sacred to followers of the three major monotheistic religions.

It is home to the Temple Mount, the holiest site in the world for Jews, who come from around the world to pray at the Western Wall, the last remaining supporting wall of the biblical temple.

Muslims revere the same plateau as the Noble Sanctuary, where the Al-Aqsa mosque stands as the third-holiest place in Islam, after Mecca and Medina.

Not far away in Jerusalem's Old City is the Church of the Holy Sepulchre, which Christians revere as the site of Jesus's tomb.

Leaders from around the world have expressed their opposition and concerns to the United States' expected move.

The unilateral move by the Trump administration would not change China's position on the issue, or its relationships with Israel and Palestine, SCMP report said citing an unnamed observer.