New Zealand went ahead in the 28th minute when Rebekah Stott lashed home a shot from close range but the game turned in the 41st minute after the Hungarian referee wrongly ruled that New Zealand defender Ria Percival had handled the ball.
Replays clearly showed the ball hit Percival in the stomach. Wang Lisi converted the spot kick and China then took the lead in the 60th minute when Wang Shanshan scored with a close range header.
Hannah Wilkinson equalized in the 64th minute but New Zealand - who have never won a World Cup game - could not score again despite heavy pressure.