Sri Lanka's new government is reviewing the award of the project to China Communications Construction Co Ltd (CCCC) because of allegations the previous administration breached laws and sidestepped environmental rules for the deal.
The project, which risks getting involved in a diplomatic row, involves development of a port city on reclaimed land in the capital Colombo, complete with shopping malls, a water sports area, golf course, hotels, apartments and marinas.
Sri Lanka's Investment Promotion Minister, Kabeer Hashim, said the Board of Investment (BOI) had asked the Chinese firm last month to halt the project until the investigation was completed.
However, the port city construction had actually been accelerated since the new government came in.
"Rightfully, they should stop," Hashim told Reuters on Wednesday. "The ministry of ports will take necessary action to halt the work until this inquiry is done."
If it was not stopped, he said, "Then legal action will be instituted against them to not proceed any further."
Chinese Foreign Ministry spokeswoman Hua Chunying said China understood and respected the desire of Sri Lanka's new government to improve the investment environment.
"We believe that Sri Lanka will take into account the overall picture of friendly bilateral ties and the basic interests of Sri Lanka's national development to appropriately resolve the relevant issue to maintain the confidence of Chinese companies investing in Sri Lanka," she told reporters on Thursday.
An official in CCCC's investor relations department said the firm was not aware of the minister's latest remarks.
"The government has made some suggestions during its review but there has been no mention of cancelling the project," said the Beijing-based official, who declined to be identified, citing company policy.
China has said the port city and another port under development in southern Sri Lanka were good for the country as tens of thousands of jobs would be created and millions of dollars of foreign direct investment would come in.
China has emerged as a major investor in the Indian Ocean island state, building ports and highways in a diplomatic push that has drawn concern in neighboring India, which has uneasy relations with Beijing.
(Reporting by Ranga Sirilal and Shihar Aneez; Additional Reporting by Brenda Goh in Shanghai and Ben Blanchard in Beijing; Editing by Sanjeev Miglani, Tom Heneghan and Alan Raybould)
Read more: http://www.businessinsider.com/r-sri-lanka-threatens-chinese-firm-with-legal-action-to-stop-project-2015-3#ixzz3TZEJ9KWc