Teenage boys at a youth prison told visiting watchdogs how staff hit them "on the body where it won't mark" during fight clubs held away from CCTV cameras.
The disclosure was one of several "worrying" incidents reported by Children's Commission staff during inspections at secure government residences for young people in the past year.
LISTEN ABOVE: CHILDREN'S COMMISSIONER ANDREW BECROFT TALKS TO MIKE HOSKING ABOUT THE REPORT
Other issues included absconsions, assaults on staff, and assaults on young people that were not reported to police.
In its annual State of Care report released today the Commission said an extremely thorough investigation into the alleged "fight clubs" was eventually inconclusive, but it had prompted fresh concern about bullying and underlying violence.
"After the allegation was disclosed, people worked night-and-day to get to the bottom of it but it couldn't be corroborated," Commissioner Andrew Becroft said.
"But there's a question mark...we know that for similar reasons that young people are less likely to make complaints about serious issues, they can also 'clam up' during an investigation."
"'Snitches get stitches' was the all-too-often refrain from the young people we interviewed."
The report is the Commission's third about children in state care, this year with a special focus on Oranga Tamariki's five secure care homes and four youth justice facilities.
Oranga Tamariki is the new agency for vulnerable children, replacing Child, Youth and Family.
Becroft said the transition between agencies was one reason it wanted to look at the residences, but it was also was prompted by an event at Don Dale Detention centre in Australia.
It emerged last year that young people at Don Dale were sprayed with tear gas - and one restrained in a spit hood for two hours - with the incident then covered up by staff.
Given New Zealand's residences shared some risk factors in common with Don Dale - for example inadequate training - the Commission decided to investigate whether similar practices could occur here.
Becroft said while it had found no evidence of systemic abuse during its inspections, it was important to remember young people often didn't report abuse or violence when in institutions.
He said while conditions at the residences were improving, it said practice was still far too variable, and the environment was dated and bleak - a particular issue in the care residences where children had not committed a crime but instead simply lacked family they could live with safely.
"I think New Zealanders would be quite sobered if they walked through a care residence. It's not something most people know about," Becroft said.
Positive aspects included seeing young people were able to go to school, had sufficient food and most staff were caring. However some teenagers reported poor practices.
"(Staff member) is quite dodgy," one young person told inspectors. "Like one of the girls punched me in the yard and he saw it and didn't do anything and just laughed. He lets the girls fight. If it comes down to him, he will just sit there and watches first and then does something."
The report recommended six-monthly monitoring as a starting point, as well as better advisory services, the formation of a clear mission statement, and more attention paid to maori - who made up 70 per cent of those in youth prison.
Ideally, it said care and protection residences largely be done away with, and replaced with smaller homes within the community, including those previously shut down.
Becroft said the youth justice facilities should also be overhauled, with a particular focus on separating those on remand from those sentenced.
"The evidence is against large residences," he said. "We regard borstals and orphanages as out-moded failures. What will be history's verdict on our current residential practice?"
Oranga Tamariki chief executive Grainne Moss welcomed the report. She said all allegations of violence and bullying were treated very seriously and were thoroughly investigated.
The new agency was working on many of the report's recommendations already, including the remand issues in youth prisons.
"Part of our transformation work includes developing smaller community based settings for those in our care," she said. "To do that we need to recruit and train specialist foster carers and find the right environments."
The State of Care: A focus on Oranga Tamariki's secure residences report covered July 2016 until March 2017 and includes monitoring of seven of the nine Oranga Tamariki residences with a total of 174 beds.