The social network refused to confirm or deny the software's existence, but said in a statement it was "spending time understanding and learning more" about China.
No decisions about the company's approach in the country had yet been made, a spokeswoman said.
The Electronic Frontier Foundation, a group which campaigns for better privacy online, told the BBC the project sounded "extremely disturbing".
"Kudos to the Facebook employees who brought this to the attention of the New York Times," said the EFF's global policy analyst Eva Galperin.
