The government ordered the probe after scientists testing clothes for TV3's Target consumer watchdog programme discovered formaldehyde concentrations up to 900 times above the safe level in woollen and cotton clothes from China.
Target producer Simon Roy said scientists from the government agency AgriQuality tested a variety of new children's and adult's clothes and the results were so astounding they thought they had made a mistake.
"Our results were shocking, ranging from 230 ppm (parts per million) to 18 000 ppm," he said. "Some of the clothes tested have a reading of 900 times the level that actually causes harm."
Formaldehyde - a chemical preservative that gives a permanent press effect to clothes and is also used as an embalming fluid - can cause problems ranging from skin rashes to cancer.
Ministry of Consumer Affairs general manager Liz MacPherson said it had launched an investigation into the nature and size of the problem.
"We're taking some urgent action to investigate it ... We're taking it very seriously," she told National Radio.
Target production manager Juanita Dobson said the garments tested were "randomly selected items" that are "readily available from common outlets around New Zealand".
Recall of children's pyjamas
Dobson told The Associated Press that Target producers would not release details of brand names or importers ahead of the show's airing on Tuesday.
In China, a woman at the media office of the General Administration of Quality Supervision, Inspection and Quarantine who gave only her surname Xia, said she had not heard about the case. The administration is China's product safety watchdog.
A woman who answered the phone at the China National Garment Association, who refused to give her name, said "I have never heard of the New Zealand case. So I have no comment on that."
A man who answered the phone at the China Textile Industry Association also said he had not heard of the case.
New Zealand cut-price retailer The Warehouse issued a recall of children's pyjamas made in China at the weekend after two children were burned when their flannelette pyjamas caught fire.
The Warehouse's corporate affairs manager, Cynthia Church, said the pyjamas had a label that read: 'Made in China' and 'Low Fire Danger.'
Church said all children's nightwear sold in New Zealand must comply with rigorous safety standards.
"As a result, the (consumer watchdog) Commerce Commission is having this particular brand of pyjamas independently tested to ensure that they comply with the relevant product safety standards," she said.
Earlier 115 000 Mattel toys made in China were recalled in New Zealand because of hazards from powerful magnets and lead paint.
Chinese exports have been under scrutiny, especially in the US, China's most important export market. Regulators have turned up tainted pet-food ingredients, seafood and toothpaste with potentially dangerous chemicals and drugs.