"The coating on the beads that causes the beads to stick to each other when water is added contains a chemical that can turn toxic when many are ingested," the commission said in a statement.
The Xinhua news agency quoted safety officials as saying production of the toys had been outsourced to a factory in Shenzhen by a Hong Kong company that was an agent of Moose Enterprises, the Australian-based maker of the toys.
The Shenzhen factory started to produce the bead toys after trial products provided to the agent received no objection, Xinhua said.
The recall is the latest in a slew of product quality scandals that has tarnished China's image as an exporter of reliable goods.
The government has tried to bolster the country's reputation by increasing inspections, selectively punishing companies and launching a campaign to boost quality.
Companies worldwide have increasingly outsourced manufacturing, often choosing Chinese factories for their cost and quality.
But heated competition among factories and the rising cost of labour, land and fuel have put pressure on profits, causing some producers to cut corners.