China widens probe into milk scandal as recalls rise

China Widens Probe Into Milk Scandal as Recalls Rise
By Lee Spears and Helen Yuan

More Photos/DetailsSept. 17 (Bloomberg) -- China widened an investigation of its food industry after contaminated milk powder killed three children and sickened more than 1,300, prompting criticism that the government waited too long to act.

The government ordered the recall of melamine-tainted products made by 22 companies, fired four officials and a company chairwoman and said food producers will undergo mandatory checks for toxic substances. Shares of dairy companies slumped in Shanghai, led by Inner Mongolia Yili Industrial Group Co.

The scandal raises questions about the effectiveness of tighter controls China promised after scares over contaminated seafood, toothpaste and pet food exports. Tainted milk powder was exported to five countries in Asia and Africa, with no shipments to the U.S. or Europe, quality inspection director Li Changjiang said at a briefing today in Beijing.

"It took too long to get public,'' said Andrew Ferrier, chief executive officer of New Zealand's Fonterra Cooperative Group, whose Chinese affiliate Sanlu Group Co. produced melamine- tainted milk. "We had been urging that from day one.

''While Fonterra, which owns 43 percent of Sanlu, urged a full public recall of the products since Aug. 2, local government officials were only prepared to have stores take items off shelves without making a public announcement, Ferrier said.

5,000 Inspectors

The government has sent 5,000 inspectors to all of the country's dairy producers, Health Minister Chen Zhu said at the same briefing where Li spoke. China will revise its food regulations to include checks for toxic substances, he said.

Melamine can be used to disguise diluted milk because it can make the protein level appear higher than it is. The industrial chemical, used to make plastics and in tanning leather, was found in exported pet food last year and blamed for killing thousands of cats and dogs in the U.S.The General Administration of Quality Supervision, Inspection and Quarantine said checks for toxic substances will be made mandatory for food producers for the first time. The regulator ordered the recall of the companies' products after samples were found to be tainted.

At least 158 infants were found to have kidney failure after 6,244 infants were brought to clinics on suspicion of being poisoned by melamine, Chen said.

China's Dairy Market

The China dairy market was worth $19 billion last year, Merrill Lynch & Co. said, citing Euromonitor data.China's biggest dairy makers, including China Mengniu Diary Co., Yili and Sanlu, were among those with products linked to tainted milk, the regulator said. Melamine was first found in Sanlu's products.Most of the affected infants ingested Sanlu milk powder and showed symptoms after three to six months, Chen said.

Goldman Sachs Group Inc. removed Mengniu from its "Conviction Buy'' list on concern suspicion among dairy consumers will hurt sales, the bank said in a note today."The scandal has raised consumer safety concerns on infant formula milk products made by domestic manufacturers and is likely to lower consumption for liquid milk in the short term,'' the note said.

Officials Fired

Sanlu Chairwoman Tian Wenhua was fired and removed from her post as the secretary of the corporation committee of the Communist Party of China, the official Xinhua News Agency reported. Four local officials in Hebei province, where Sanlu is based, were also fired, Xinhua said.

Officials at Sanlu and Yili were unavailable for comment. Calls to the companies in the past two days weren't returned. Sanlu apologized to consumers and promised to recall all milk powder produced before Aug. 6, Xinhua News reported Sept. 15.

Melamine allows producers squeezed by inflation and government-imposed price limits to get "higher-rated protein content at no extra cost,'' according to Steve Dickinson, a partner at law firm Harris Moure Plc who has studied China's food-safety system.

"The milk scandal is like a tsunami for the food industry,'' Guo Changsheng, an analyst at Shanghai Securities Co., said. "Food exports will again be greatly hurt amid concerns over quality and safety. China needs to rebuild its entire food standard system.

''Earlier this year, pesticide-tainted dumplings imported from China sickened at least 10 people in Japan.China in 2007 signed agreements with the U.S. designed to boost food and drug safety after tainted goods from China, including toys with lead paint, and contaminated seafood, toothpaste and pet food, reached consumers.

Mengniu Recall

Mengniu, whose shares were suspended in Hong Kong today, said it will recall products that fail tests and will offer compensation to affected customers.Yili fell by the daily limit of 10 percent in Shanghai to 12.09 yuan, the lowest price since March 2006.

Synutra International Inc., a Chinese maker of infant formula, lost more than half its value in Nasdaq trading after eight batches of its products appeared on China's list of tainted infant formula.

Two companies had exported milk to Bangladesh, Myanmar, Yemen, Burundi and Gabon, the quality-inspection agency said.

China imported $1.2 billion of dairy products in 2007, with milk powder being the biggest import, Michael Harvey, international analyst with Melbourne-based trade group Dairy Australia said.

To contact the reporters on this story: Lee Spears in Beijing at lspears2@bloomberg.net; Helen Yuan in Shanghai at hyuan@bloomberg.net

This is pretty much the biggest news story in Taiwan at the moment. It took them like 2 or 3 days to even bother making it to the front page/main news broadcast, but after it did the China bashing hasn't stopped.

I mean, with good reason of course. This problem is terribly wide-spread, particularly in Taiwan where a lot of the products are imported. A certain type of coffee has taken a hit, as has a few local baby milk-formula companies. Anything containing milk-products imported from China has been pulled from the shelves. I saw Oreos were pulled, though they've been cleared I believe.