Albumin, or plasma protein, is used to treat patients suffering from shock and burns and during open-heart surgery.
Experts suggest that the fake product could be life-threatening for those already in a serious condition.
The scandal is the latest to expose weaknesses in China's regulation of food and drug standards.
Big profit
The food and drug administration in the north-eastern state of Jilin found 18 hospitals and more than 30 pharmacies were sold or were selling false batches of the albumin.
"There was no element of protein, so it could not perform its intended function," said the administration's deputy director, Xu Fei.
"These were out-and-out fakes," he added.
Officials did not say whether anyone had died or fallen ill through using the false protein, though one Chinese newspaper said it had led to one death.
China Central Television cited an official saying those making the false albumin were making a 300% profit, assisted by shortages of the genuine product.
The administration said its investigations had "effectively cleaned up the market".
Series of scandals
China has launched a nationwide clampdown on counterfeit products after a series of scandals.
In one of the worst cases 13 babies died from malnutrition after being fed fake baby milk.
Last month the country's top food and drug regulator was sentenced to death for taking bribes to approve medicines not properly tested for safety.
Toothpaste, anti-malarial drugs and pet food have also been found to contain contaminated or fake ingredients.
The tainted toothpaste has been blamed for dozens of deaths in Panama.
The US and EU have expressed concern over food and drug imports from China, and have pressed Beijing to improve its oversight.
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