Mr Musk said his firm would be “shut down” if it were involved in such practices. The Chinese military had raised concerns about cameras in the vehicles.
Mr Musk addressed the move during the virtual China Development Forum, an annual conference.
He said: “There’s a very strong incentive for us to be very confidential with any information.
”If Tesla used cars to spy in China, or anywhere, we will get shut down.”
According to sources cited by yahoo.com, after the purported discovery, officials told Tesla owners to leave their cars outside military facilities.
Mr Musk, who is also the founder of SpaceX, has previously addressed his resolution to send a million people to live on Mars by 2050.
He has openly spoken about building cities on the planet, explaining that large numbers of people would be needed to push the project forward.
During an international conference in Mexico in 2016, Mr Musk argued that the extinction of human life could be avoided by moving planets.
He said such a venture would mean humanity would “become a spacefaring civilisation and a multi-planet species, which I hope you would agree is the right way to go.”
US astrophysicist Dr Neil deGrasse Tyson highlighted the high complexity of the process.
He told the conference: “To ship a billion people to another planet to help them survive a catastrophe on Earth seems unrealistic.
“If you want to call Mars home, you need to terraform Mars, turn it into Earth.”
He added: “It is so much easier to make Earth return to Earth again rather than terraforming Mars.”