According to Xinhua, the state-owned news agency, authorities in Shanghai have ordered the suspension of operations at Shanghai Husi Food Co.
Reports by local media said that Husi had re-processed expired meat products.
McDonald’s and KFC said they had stopped using meat from Husi.
In a statement posted on its website, translated from Mandarin, the Shanghai Municipal Food and Drug Administration said it had “decided to investigate claims of the alleged use of expired raw food material production and the processing of it in food”.
Shanghai Husi is the Chinese unit of US-based food supplier OSI Group.
According to OSI’s website, the company’s unit in China “started to provide high-quality products to McDonald’s China” in 1992.
The unit began supplying Yum China in 2008. Yum China manages the KFC and Pizza Hut chains and its sales have been hit by recent health scares.
Yum’s sales dipped after a report in 2012 said two of its suppliers were providing chickens with excessive levels of antibiotics.
Just as the firm was recovering from those allegations, fears of an outbreak of bird flu in the country dented its sales.
Benjamin Cavender from consultancy China Market Research Group, based in Shanghai said: “Yum has just started rebuilding credibility and had some decent sales which just came out for the second quarter.
“I think this is really going to set them back.”
According to figures from research firm Euromonitor, McDonald’s and Yum are the two leading fast food chains in China, based on sales.
Speaking to Reuters a spokesperson for McDonald’s in China said: “If proven, the practices outlined in the reports are completely unacceptable to McDonald’s anywhere in the world”
She added that the firm used a “few protein suppliers” in China.