The Panamanian-flagged 274-metre (899-foot) tanker Sanchi was operated by Iran's Glory Shipping and heading to South Korea with its cargo, the ministry said.
Reuters reports that the Panama-flagged Sanchi is managed by the National Iranian Tanker Company (NITC), owned by Bright Shipping and chartered by Hanwha Total Petrochemical. Chinese maritime authorities have dispatched eight vessels, including three specialised cleansing vessels, for search and rescue.
The Panama-registered tanker was sailing from Iran to South Korea when it collided with the Hong Kong-registered freighter CF Crystal 257 kilometers (160 miles) from shore late Saturday, the Ministry of Transport said.
Chinese state media CCTV showed pictures yesterday of the tanker ablaze and billowing plumes of thick dark smoke.
"The Sanchi is still floating and continues to burn, there is oil on the sea surface; search and rescue operations are rushing and underway", the ministry said in a statement.
The cause of the collision was under investigation, it added.
South Korea has also sent a ship and helicopter to help.
That was nearly twice the size of the Exxon Valdez spill, which ravaged Alaska's coast in 1989.
The Chinese government gave no details of the size of the spill.
This is the first major accident involving an Iranian oil tanker since worldwide sanctions were lifted in January 2016.
"We are working very closely with the relevant authorities to establish the facts surrounding the collision", it said in a statement. The 225-meter-long second vessel CF CRYSTAL, carrying 64,000 tonnes of grain, was partly damaged in the collision.