China's difficult relationship with food safety has spurred another scandal, ensnaring Western fast-food chains which may have been duped into buying tainted meat.

OSI Group's China affiliate, which supplies McDonald's and Yum Group's KFC on the mainland, was accused of using expired meat and unhygienic practices in a July 20 report from Shanghai TV, a local television station under SMG Group.

The seven-minute-long report from a reporter who went undercover for two months in OSI group's Shanghai workshops showed a batch of chicken breast and chicken skin that had been expired for around 12 days at the time of the filming.

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The reporter asked, "Is it ok to use them?" and the answer was "no problem." The chicken was turned into chicken nuggets.

"The rules are dead, and people are alive, that's simple," a worker said in the report. "Dead rules and alive people" is commonly used in China to indicate corners have been cut. OSI did not immediately respond to the news report.

The person who answered the phone at OSI refused to provide her name, but told CNBC that the company is cooperating with the investigation and would release a statement when it is ready.

The report doesn't directly criticize either McDonald's or KFC, noting instead that OSI, which has production capacity of around 25,000 tons of meat a year, was working to dupe the companies' inspectors.

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A short clip showed McDonald's inspection team touring the workshop, while a recorded conversation between workers and the reporter indicated the team wasn't aware of OSI's practices.

"We can't let McDonald's or Yum China know that we add (chicken skin)," the same worker said. "They won't let us do that. Otherwise, we would lose the contracts. Who wants to do business with you if you break your promise?"

Once the inspection team left the workshop, unqualified chicken nuggets stored in blue bags were put back onto the production lines along with the qualified batch, the video showed.

The report also showed a printed work notice saying, "please help extend the expiration date" on a batch of beef that was already rank; the expiration was extended for another year, according to the report.

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In addition, the report accused OSI group of having two sets of record books, with the video showing a former company inspection staffer in a mask telling the reporter about one set for inspectors and one for internal use.

"McDonald's has zero tolerance for any mispractices and we abide strictly by all laws and regulations with strict standards for ourselves and for all suppliers," McDonald's said in a statement in the hours after the report was aired. "There is no compromise to the well-being and food safety standards that Chinese consumers have come to expect from us."

Yum China released a similar statement on its Weibo account, saying all OSI-supplied meat products will be removed from its shelves.

Both McDonald's and Yum China said they may face shortages of some of their meat products.

Gu Zhenhua, the deputy chief at the government's Shanghai Food Safety Committee, and his team were faced with a 90-minute stalemate Sunday evening before being allowed into the factory for a storm inspection at OSI, according to SMG's official Weibo account.

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SMG's report quickly went viral on the Internet in China, sparking outrage.

Nearly 8,000 comments were left on Phoenix TV's website after it rebroadcast the report.

"The news says the supplier also supplies for Pizza Hut7-11, Burger King, Subway and Ikea. We can't eat anything now," one comment said.

Other comments criticized the entire foreign fast-food industry.

"Many Chinese believe foreign brands have stringent food safety, but they are the biggest purchasers of problematic food! Where's the quality control? They have to be fined heavily," one comment said.

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