Sri Lanka's cabinet said on Thursday it would allow a $1.5 billion "port city" deal with China to go ahead, dropping a threat to cancel a project approved by the previous government.

Cabinet spokesman Rajitha Senaratne said President Maithripala Sirisena would, however, discuss arrangements over the freehold of land to be used when he visits China in March.

Sri Lanka's neighbor India has raised concern over security threats posed by Chinese ownership of the freehold of 20 hectares of land next to the main commercial port in Colombo. India uses Colombo as a transshipment port.

Sri Lanka's new prime minister, Ranil Wickremesinghe, said before last month's presidential vote he would cancel the deal if his party came to power because no environmental impact assessment (EIA) or feasibility study had been presented to parliament.

Sirisena, backed by Wickremesinghe's party, unseated the former president, Mahinda Rajapaksa, in the polls.

"The prime minister said that an EIA has been done for land reclamation. However, it needs a second EIA for constructions after the land is reclaimed," Senaratne told reporters on Thursday, adding that a feasibility test had been carried out.

"He informed the cabinet that this has to be looked at with the relationship with China and to make any alterations where possible with the understanding of the Chinese government."

Asked if this meant the government would allow the project to go ahead, the spokesman replied: "Yes."

Speaking to Foreign Minister Mangala Samaraweera in Colombo, China's assistant foreign minister, Liu Jianchao, said the plan, and another port project in the south, were good for Sri Lanka.

"(We) believe that the new Sri Lankan government will act upon the basic interests of Sino-Sri Lanka friendship and national development to ensure important cooperation projects do not experience ups and downs because of changes in the political situation," China's foreign ministry cited Liu as saying.

Chinese President Xi Jinping launched the project when he visited last year.

Under the proposed deal, 108 hectares of the site on reclaimed land would be taken over by China Communications Construction Co Ltd, including 20 hectares on an outright basis and the rest on a 99-year lease.

In a newspaper advertisement on Thursday, Jiang Houliang, head of CHEC Colombo Port City (Pvt) Ltd., a subsidiary of the state-owned Chinese investor, said his firm estimated 83,000 jobs and $13 billion of foreign direct investment would come from the project over 10 years.

The development will include shops, golf course, hotels, apartments and marinas.