The Xinhua news agency, citing the country's swimming association (CSA), said Chen had tested positive for a banned substance on Aug. 7 in the latest doping scandal to mar competition at the Games.
Chen was listed on the official start sheets on Friday as the heats got under way and then recorded on the results as DNS (did not start).
Controversies over doping overshadowed the build-up to Rio and, far from dying down as events got under way, have flared anew as U.S. and Australian competitors have branded their Russian and Chinese rivals drug cheats.
Chen, 18, failed a test for the diuretic hydrochlorothiazide and had applied to the International Olympic Committee (IOC) for a hearing to look into the matter, Xinhua said.
It added that the CSA had required Chen to cooperate with the investigation.
"If the assertion is true, the CSA will earnestly implement anti-doping regulations and safeguard legal interests according to law," Xinhua cited an unnamed CSA official as saying in a statement.
"The Chinese Swimming Association resolutely opposes the use of banned substances, will actively cooperate with the investigation by the Court of Arbitration for Sport, and respect its final ruling," the official said.
Hydrochlorothiazide, known as a masking agent, is a banned substance because it can be used to spur weight loss and cover up the presence of other illegal drugs by diluting urine collected in doping tests.
The World Anti-Doping Agency (WADA) said in March that it would investigate allegations that Chinese swimming covered up positive tests ahead of Olympic trials.
China，which topped the medals table at the 2008 Beijing Olympics and came in second at the 2012 London Games behind the United States, has said it has a zero-tolerance approach to doping and had taken "all necessary measures" to ensure that its athletes were clean.
Chen finished fourth in the women's 100m butterfly final on Sunday.
"It wasn't quite perfect but there are no regrets after trying one's hardest," Chen wrote on her official microblog on Monday in her only post this year.
"Go team China!" she said.
Doping allegations have plagued this year's swimming competitions after Australian Mack Horton called his rival and fellow Olympic swimming gold medallist Sun Yang a "drug cheat", and U.S. gold medallist Lily King criticised Russia's twice-banned swimmer Yulia Efimova.
Sun was revealed two years ago to have secretly served a three-month suspension for using a banned stimulant. He said at the time the stimulant was medication to treat a heart issue and did not enhance his performance.
Efimova was allowed to compete at the Games only after winning an appeal against a ban for a previous doping offence.
(Reporting by Michael Martina/Alan Baldwin; Editing by Greg Stutchbury and Clare Fallon)
