Consumer confidence

"The widely reported incident could affect consumer confidence in local infant formula products as well as other dairy products before any definitive answers are found", Morgan Stanley's Angela Moh and Lillian Lou said in a note last week.

Sanlu had about 18 percent market share in the milk powder market in China, Credit Suisse Group AG's analyst Catherine Lim said in a note last week. Yili gets 18 percent of its first-half sales from milk powder, Morgan Stanley said.

Sanlu Group, 43 percent owned by New Zealand's Fonterra Cooperative Group Ltd, apologized to consumers and promised to recall all milk powder produced before August 6, Xinhua News Agency reported late last week. The milk powder was tainted with melamine, a white crystalline compound used to make plastics and tanning leather, the government says.

Milk sellers diluted milk with water to increase inventory, and then used melamine, which mimics protein, to boost the apparent protein content, the government adds.

"The Sanlu incident highlighted the issue that China's fast-growing milk industry hasn't had enough self-owned pasture lands to breed cattle", says Xu Biao, a Beijing-based analyst with Citic Securities Co. "They have to purchase raw milk from outside farmers, which may result in quality problems".

The incident underscores the battle China faces in scrutinizing product quality and ensuring food safety. Thirteen babies died of malnutrition in 2004 and almost 200 were admitted to hospital in East China's Anhui province that year after being fed substandard milk.

"Because there's that constant fear of something like this, it really undermines the position of all other domestic brands", says Bruce McLaughlin, CEO of Shanghai Sinogie Consulting Co, which helps foreign companies find manufacturing partners.

Sophie Chen, 32, the mother of a 1-year-old boy living in Shanghai, says the Sanlu scandal led her to decide to buy only imported infant milk powder.

"Most families in China have only one child. We want to give them the best," she adds.

Facing alarm at the latest food safety scandal, the government sacked at least six officials in Shijiazhuang, capital of Hebei province in North China and from the Sanlu Group.

The firings included the mayor Ji Chuntang and vice mayor in charge of agriculture, Zhang Fawang, and the director of the city's food and drug watchdog, Zhang Yi, as well as chief officials for animal husbandry and quality inspection.

The chairwoman and general manager of Sanlu, Tian Wenhua, was also dismissed from what has been China's biggest seller of infant milk powder.