Police seized more than 3,000 tonnes of illegally manufactured cooking oil last month in raids on 13 underground workshops and licensed factories on the mainland.
More than 100 suspects involved in the national production and distribution network were arrested.
Residents of a village in Jinhua, Zhejiang, had reported a suspicious workshop to local police in October, the Ministry of Public Security said on its website yesterday.
Sumeng residents said a strong smell of animal fat often wafted from a farmhouse in the village.
Police officer Shao Wenzhong told China Central Television that a site investigation had turned up mainly empty, stained barrels. Officers found bricks of animal fat in the courtyard, which led them to a nearby slaughterhouse.
Fu Xuejun, a police officer in Jinhua's Jiangnan district, told the broadcaster that the workshop was using animal organs - such as stomachs, intestines and livers, some of which were rotting - to make oil. The final product was physically and chemically different from the 'gutter oil' illegally produced by collecting discarded oil from restaurant waste.
Police said workshop owner Li Weijian ran the business with his family. They sold the product to licensed oil companies in Anhui, Shanghai, Jiangsu and Chongqing, which then sold it to food-processing factories. It reached customers in various forms - from canned food to hot pots. Li's family allegedly made more than 10 million yuan (HK$12.3 million) from the business last year, producing oil for 5,000 yuan a tonne and selling it for 7,600 yuan to manufacturers, who distributed it for 12,500 yuan a tonne.
The ministry said it launched a co-ordinated operation in six provinces on March 21. Police shut down 13 workshops and factories linked to the business and confiscated more than 3,200 tonnes of the illicit oil. Li was among the suspects arrested.
Authorities said the Kangrun Food Ingredient Co in Lianyungang, Jiangsu, made nearly 5,000 yuan for each tonne of oil it bought from Li and resold. It could not be reached for comment yesterday.
The ministry admitted it has not been able to stamp out the problem of illicit oil despite a huge campaign.
In 2010, a Wuhan University researcher said gutter oil made up one-tenth of the mainland oil market, and half of it was sold as cooking oil. He was forced to withdraw his remarks.