Infant formula sold by New Zealand supermarket chains to Hong Kong is being smuggled into China as part of a black-market trade in imported milk powder.
Countdown says four of its supermarkets are legally selling Karicare infant formula to exporters who are shipping it to Hong Kong.
From there, it is being smuggled into mainland China in a trade in which arrests now eclipse those for drug trafficking in the region.
On the mainland, it is being sold on the Chinese equivalent of Trade Me.
Countdown receipts are shown to prove it is New Zealand-made.
Rival supermarket owner Foodstuffs is also involved in the trade.
Foodstuffs Auckland's general manager of retail, Rob Chemaly, said its Pak'nSave and New World stores could not sell formula in bulk as they were not certified, but the company's Gilmours wholesale stores had gained the certification and had been selling to exporters for several months.
The smuggling revelation has emerged in a Weekend Herald investigation into the state of infant formula produced in New Zealand after the state-run CCTV network in China last month ran a series of critical news items on our standards.
Industry sources with inside knowledge of the trade, who didn't want to be named, said Hong Kong wasn't the intended market for Karicare exported from New Zealand and traders often had to bribe Chinese border officials to get the product into China, where it continues to be sold on websites such as Taobao, usually for about 200 RMB ($41) a can.
One Taobao trader has photographs of the Gilmours and Countdown receipts for Karicare displayed on the website and also describes how the product is freighted to mainland China via Hong Kong.
Karicare made for New Zealand cannot be legally exported to China, as different standards apply for products entering that market and a Ministry for Primary Industries "official assurance" certification required to confirm the goods have been manufactured to Chinese standards.
Formula going to Hong Kong does not require that certification.
"What happens to product once it legally enters another country cannot be directly controlled by MPI and it is up to that country's competent authority to regulate any subsequent exports," said the ministry's deputy director general, Carol Barnao.
The ministry was aware that infant formula products from around the world "are sometimes transferred from Hong Kong into China without following all the legal processes".
A whole industry has sprung up in Hong Kong with the sole purpose of getting containers of imported formula across the Chinese border without quarantine stamps or receipts for customs duties, London's Sunday Times reported.
Sources say travellers take a lot of formula across the border, although that is more difficult since a two-can limit was introduced in March.
Traders are now reportedly paying travellers to cross the border with formula, two cans at a time, and a photograph on the South China Morning Post website shows a trader at the border with a consignment of Karicare.
Arrests at Hong Kong's border for baby formula smuggling are now exceeded those for drug-running. at Hong Kong's border, Between March 1 - when China's new restrictions were imposed - and April 23, Hong Kong Customs arrested 879 people carrying 8,841kg of infant formula.
One source said the four Countdown stores sold up to 400 pallets, or around 144,000 cans, of Karicare formula each week to exporters.
The Countdown spokeswoman would not disclose export sales, but said: "Average weekly sales to licensed exporters are substantially less than 400 pallets a week."
Mr Chemaly said Foodstuffs understood that the baby formula it supplied was being sold legally to the Hong Kong market, and the Countdown spokeswoman said the company had "no visibility" on where the products it was selling to exporters were going.