Back in the old days, firecrackers were exploded when opening new stores and during Chinese New Year. Afterwards water was splashed on the remains of the firecrackers to prevent any unexploded crackers exploding and possibly hurting someone.
This phrase seems to have three different meanings. The first is “useless”, since wet firecrackers can’t explode, they aren’t performing their function and are useless as firecrackers. Secondly, the phrase can be used to describe someone who is well tempered, in that they do not explode. Thirdly, it can be used to describe suppressing one’s anger
The phrase is similar to the English phrase “damp squib”