The holding camps will take up to 70,000 people from the increasingly unsanitary conditions at temporary shelters put up around state buildings.
The government decision comes despite strong advice from respected international aid agencies.
They say South Africa does not have the expertise necessary to run the camps.
Medecins Sans Frontiers (MSF), the medical charity, says conditions for people seeking refuge in the existing shelters are worsening.
With the cabinet expected to announce its plans later on Wednesday, aid agencies fear the government has little experience of running what are likely to become semi-permanent refugee camps, says the BBC's Africa editor, Martin Plaut.
Establishing such camps could come back to haunt the country for many years to come, our Africa editor adds.
MSF said it was finding cases of diarrhoea and chest infections in overcrowded shelters near Johannesburg.
The International Red Cross's Francoise Le Goff told the BBC it was vital the workers left these temporary shelters.
"We have problems with sanitation; it's cold; people are getting sick, so their security is barely there," she said.
"People need to leave this place and have an area where they can settle a little better and where they can reorganise a better life."
Fifty-six people have been killed and more than 650 injured in the attacks, according to officials.
MSF South Africa programme director Muriel Cornelis said conditions for displaced people sheltering in makeshift camps or outdoors were starting to become "deplorable".
"None of the sites provide enough latrines, enough toilets, enough showers, enough access to water," she said.
"You have some portable latrines but they're not being removed or cleaned so therefore at one point people no longer use them and they use the grass."
But Able Bapela, the head of a parliamentary task force, told the BBC's Focus on Africa that victims of violence were receiving "humanitarian sympathy and support".
Earlier, Safety and Security Minister Charles Nqakula said more than 1,300 arrests had been made and special courts had been set up to deal with the situation.
South African President Thabo Mbeki has denounced the anti-immigrant violence as the worst acts of inhumanity South Africa has seen since the end of apartheid.
But the president has been criticised for his handling of the crisis, including a response which some have seen as slow.
The feeling that foreigners are harder working and better educated than locals may have bred resentment, he says.
Social inequality and the political domination of the ruling African National Congress (ANC) could also have contributed to the frustrations that fuelled the recent attacks, he adds.
The troubles flared with a wave of attacks on foreigners in the township of Alexandra, within sight of some of Johannesburg's most expensive suburbs.
They have since spread to seven of South Africa's nine provinces.
Many people have fled South Africa to countries including Zambia, Mozambique and Botswana.
The Red Cross said on Tuesday that 27,000 had fled to Mozambique alone.