Crisis curdles China's fledgling dairy sector
By Kent Ewing

HONG KONG - China's national crisis over tainted baby milk formula has been likened to a "tsunami" for the nation's food export industry and has soured some of the biggest names in its booming, US$19 billion dairy sector.

The situation escalated sharply in recent days with three infants dead following kidney failure linked to the chemical melamine found in the toxic milk. According to China's health minister, Chen Zhu, 6,244 children have fallen ill and 1,327 babies remained hospitalized, with 158 suffering from acute kidney failure. The number of afflicted is expected to increase.

China has ordered a mass recall of infant formula and sent 5,000

 

inspectors to all of the country's dairy producers, Chen told a press conference in Beijing. Still, the crisis has revived concerns about China's product quality after signing international agreements designed to boost food and drug safety.

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

China Central Television (CCTV) reported Tuesday night that 22 companies including the Sanlu Group, China Mengniu Dairy and Inner Mongolia Yili Industrial - the three biggest dairy manufacturers on the Chinese market - have been named in the widening scandal.

According to estimates by Merrill Lynch & Co, China's dairy industry is now worth $19 billion on the strength of rising income levels. The nation's infant milk formula sector alone is believed to be a multibillion-dollar industry - despite a 2004 scandal in which 13 infant died of malnutrition after drinking bogus baby formula with no nutritional content.

Melamine is a chemical additive used in plastics, fertilizers and cleaning agents. It can also be used to disguise sub-standard food products and animal feed by boosting protein content. Alone melamine isn't toxic, experts say, but combined with other compounds it can cause kidney problems. Many infants who had consumed the formula developed kidney stones.

Melamine is the same substance discovered last year in Chinese-made pet food that poisoned thousands of animals in the US. A heath official told local media in Beijing that contaminated milk powder had been exported to five countries in Asia and Africa.

The formerly state-owned Sanlu Group, now 43% owned by New Zealand diary giant the Fonterra Cooperation Group, stands accused of covering up the crisis for several months, possibly to avoid upsetting the euphoria of the Summer Games.

New Zealand Prime Minister Helen Clark said local Chinese officials "put a towel over" the scandal until her government complained to central authorities in Beijing. Fonterra representatives had been "trying for weeks" to persuade local officials to announce a recall, the prime minister said.

"When the New Zealand government blew the whistle in Beijing," the prime minister said, "a very heavy hand then descended on the local authorities."

As reported by Bloomberg, China announced an investigation into Sanlu's infant formula last week after reports of a rash of cases of kidney stones in infants in at least seven provinces. Sanlu has since admitted that it knew of the contamination in early August.

According to reports, a Sanlu chairwoman and general manager, Tian Wenhua, was forced to step down and four city officials including the vice mayor of Shijiazhuang, the capital of Hebei province, where Sanlu is headquartered, have also been sacked.

Sanlu has ordered a recall of its milk powder and more than 10,000 tons of the formula, which is sold only on the mainland and in Taiwan, have been seized or recalled. Sanlu apologized to consumers and promised to recall all milk powder produced before August 6, China's state-run Xinhua news agency reported.

The central government pledged to pay the medical bills for all the stricken children.

"This is a severe food safety accident," said Gao Qiang, deputy head of the health ministry. "Sanlu Group should take a large part of the responsibility."

According to reports from New Zealand, Fonterra CEO Andrew Ferrier has said the company, has done a lot of "soul searching" over the contaminated milk crisis. He claimed that Fonterra, which is reported to be responsible for more than a third of the international dairy trade, has played a part in testing milk products in China but melamine was never tested. Ferrier added that the Chinese government is working with affected families.

Meanwhile, the Ministry of Health launched a probe of the nation's 175 baby formula producers.

Additionally, quality inspection teams have been dispatched to the provinces of Hebei, Guangdong and Heilongjiang and to the autonomous region of Inner Mongolia, where the large majority of China's dairy industry is located. There are now 150 testing centers examining milk formula across the nation.

Inner Mongolia's Yili was an authorized sponsor of the Beijing Olympics and Paralympics, but authorities said yesterday that no contamination has been found in milk products provided at the events.

China Mengniu will recall all products that fail chemical tests and the company will offer compensation to affected customers, the company said in a statement today.

Shares were suspended in Hong Kong on Tuesday at HK$20, compared with their 52-week high of HK$36.75. Yili shares, which by the start of this month had already halved in value from above 31 yen since October amid a general market decline, fell almost 10% in Shanghai on Wednesday, to 12.09 yen.

"China's safety standards, like the international food code, did not include any checks for toxic substances because nobody had ever considered the possibility that these substances could be added,'' food quality inspection director Li Changjiang said today in Beijing. "We will revise food codes to include checks on toxicity.''

The government of Hebei province has trumpeted the detention of 19 people, 18 of whom operate dairy farms or milking plants. The other is reportedly a dealer in melamine.

In addition, two brothers, surnamed Geng, have been arrested for allegedly selling three tons of contaminated milk per day at their milk-collection center in Hebei, according to Xinhua. The agency reported that the brothers are suspected of adding melamine to milk after milk from their center was previously rejected by Sanlu for failing to meet company standards.

Still, the crackdowns, inspections and sackings are unlikely to appease angry parents who told state media that the company ignored their complaints about their sick children as early as March. According to health officials, the first two reported deaths - a 5-month-old boy and an 8-month-old girl - occurred in Gansu province on May 1 and July 22.

Many expect the tragic numbers to grow as the belated investigation widens into China's dairy industry. The fledgling industry produced 54 million tons of dairy products last year but still cannot keep up with rising demand.

Despite a newfound appetite for non-traditional dairy products, the dairy sector has been stymied by lax quality control and a culture of covering up life-threatening mistakes.

In a time when the Chinese government is eager to boost domestic consumption, the scandal has smashed consumers' confidence in domestic dairy products. On the Internet, bloggers wrote: "My Heavens! What home brand can I trust now?" and "Save our children!"

A New Zealand news agency has reported that the panic over the safety of baby food is so great that thousands of parents in southern China have flooded into Hong Kong to buy foreign-made milk powder.

While visiting Shijiazhuang, quality watchdog Li examined bags of contaminated milk powder seized by police and, according to the China Daily, pronounced: "It's shocking. It's a crime against the people."

Kent Ewing is a Hong Kong-based teacher and writer. He can be reached at kewing@hkis.edu.hk.

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