Fonterra has launched an internal probe after 19 people were arrested in Shanghai for selling nearly 300 tonnes of expired milk powder.
The suspects were reportedly managing a company which was packaging expired products of the New Zealand dairy giant into smaller packages for resale below market prices.
After a lengthy investigation, police discovered one of the suspects sold the expired products to another company, who in turn allegedly resold almost 200 tonnes to distributors in Shanghai and in the Jiangsu, Henan and Qinghai provinces, who sold them on e-commerce platforms or in wholesale.
Authorities have seized 100 tonnes of these products and have shut down the websites selling them.
A spokesman for Fonterra said the company supported the action taken by Chinese authorities and that it believed the case was a one-off.
"We support the enforcement steps taken by Chinese officials. While we believe this is an isolated criminal incident, we are reviewing the case internally," spokesman Phil Johnstone told Reuters.
The milk powder scandal is the latest to hit China's beleaguered food industry, where food safety incidents, including sale of adulterated or expired products have been on the rise.
The dairy sector has been among the worst affected by such incidents.
In 2008, six babies died and 300,000 were affected by melamine-contaminated baby milk powder produced in China, prompting many Chinese citizens to begin turning to foreign milk products.
Another scandal shook the industry in 2013 when Fonterra admitted that some of its products exported to China were contaminated by bacteria because of a dirty pipe at one of its plants.
Fonterra is one of the biggest suppliers of dairy to the Chinese market, but issues of over-supply and high inventory levels have pushed down prices and led some producers in China to dump stock.
New Zealand accounted for 40 percent of China's imports dairy products during the first seven months of this year, official China customs data show.