The Sunday Times said a young girl had found a note in a charity card sold by British supermarket giant Tesco reading: "We are foreign prisoners in Shanghai Qingpu Prison China. Forced to work against our will."
The newspaper said the message urged whoever received it to contact Peter Humphrey, a British former journalist and corporate fraud investigator who was imprisoned in the same jail from 2014-2015.
Tesco suspended the Chinese supplier of the Christmas cards on Sunday and said it had launched an investigation.
China's Foreign Ministry spokesman Geng Shuang told a press briefing on Monday: "I can responsibly say, according to the relevant organs, Shanghai's Qingpu prison does not have this issue of foreign prisoners being forced to work."
Geng Shuang dismissed the whole story as "a farce created by Mr. Humphrey" - an accusation dismissed by Humphrey.
"I never had any possible way to fabricate anything at all in this incident and this story," Humphrey told Reuters. "This message from prisoners in China came in a Christmas card purchased by a family who I've never met, never known until that moment in time," he added.
Humphrey said the message fitted "with everything I know, and I have spoken with ex-prisoners who were released this year and who confirmed that that prison unit was making packaging for Tesco Christmas cards."
Humphrey spent 23 months in prison on charges of illegally obtaining private records of Chinese citizens and selling the information to clients including drugmaker GlaxoSmithKline.
Humphrey said during his trial he had not thought his activities in China were illegal.The Sunday Times said the message had been found in London by six-year-old Florence Widdicombe who showed it to her father. He then contacted Humphrey via LinkedIn.