The inquiry will look into whether Australian winemakers dumped cheap bottles of wine into China over a five-year period, drowning out local producers.

Trade Minister Simon Birmingham described confirmation of the inquiry as "a very disappointing and perplexing development".

"Australian wine is not sold at below market prices and exports are not subsidised," Senator Birmingham said.

"Australia will engage fully with the Chinese process to strongly argue the case that there are no grounds to uphold the claims being made."

Agriculture Minister David Littleproud also flatly rejected the dumping allegations.

He has committed to working closely with industry figures to fight the claims.

"Australia produces some of the best quality and most popular wine in the world," Mr Littleproud said on Tuesday.

"That reputation has been recognised by Chinese consumers who have helped make China our largest export market with $1.1 billion exported in 2019/20."

Labor's trade spokeswoman Madeleine King said the Australian wine industry and Chinese consumers had long benefited from a respectful relationship.

"Labor urges the government to use all appropriate diplomatic channels to address these allegations during the upcoming investigation process to ensure China does not ultimately proceed to levy import duties on Australian wine," she said.

China is Australia's largest trading partner.

But the relationship has been heavily strained by disputes over coronavirus, territorial claims in the South China Sea, Beijing's security crackdown on Hong Kong and the decision to ban Huawei from Australia's 5G network.

China recently imposed tariffs on Australian barley, suspended some beef imports and warned students and tourists it was not safe to travel to Australia because of allegations of racism.

Chinese state media has previously warned Australian wine could be targeted in the rolling diplomatic row.

The anti-dumping investigation is expected to run for a year.

Shares in Treasury Wine Estates slumped more than 13 per cent as news of the investigation emerged, and have since been halted from trading on the Australian Stock Exchange.

TWE, which imports premium brands such as Penfolds into China, said it would co-operate with the investigation.

"TWE's focus will remain on building premium and luxury brands, investing in the local operating model and team, and working with partners to enhance the wine category and grow our contribution to China," the company said in a statement to the ASX.

Australian Associated Press