Inaccurately transmitted gossip. 'Chinese whispers' refers to a sequence of repetitions of a story, each one differing slightly from the original, so that the final telling bears only a scant resemblance to the original.
The expression 'Chinese whispers' is commonly used in the UK and many other parts of the English-speaking world, although less so in the USA. It derives from the party game in which one person whispers a message to the person next to them and the story is then passed progressively to several others, with inaccuracies accumulating as the game goes on. The point of the game is the amusement obtained from the last player's announcement of the story they heard, that typically being nothing like the original. The game is played in all parts of the world and each country has its own names for it, notably, in the USA it is usually called 'Telephone' or 'Gossip'.
The name 'Chinese Whispers' was adopted for the game in the UK in the mid 20th century, prior to that it was known as 'Russian Scandal' or 'Russian Gossip'. The reason for the change isn't clear. It is sometimes suggested that the phrase is a racial slur and is intended to convey the idea that the Chinese talk nonsense. I see no reason to assume that. The English aren't especially badly disposed towards the Chinese - there are many other races on the UK hit list above the Chinese. I think the decision by whoever coined the phrase had more to do with the Chinese language being more incomprehensible to English ears than Russian. If there is any racial stereotyping inherent in the phrase it may be by an association with the idea that the Chinese are inscrutable.
The first citation of the name in print is found in the English newspaper The Guardian, March 1964:
The children's game of 'Chinese whispers'... in which whispered messages were passed around the room and the version which came back to the starting point bore no relation to the original message.
The use in a more general sense, to describe everyday mis-telling of stories, began as recently as the 1980s. It first started appearing in print and in online postings in Usenet newsgroups in 1989. This was probably a consequence of the use of 'Chinese Whispers' as the name of a track on the 1985 album Stereotomy by The English rock group The Alan Parsons Project.