China's infant formula companies have been encouraged to buy up overseas producers with the aim of targeting the mid to high end of their home market.
A statement from China's National Development and Reform Commission (NDRC), outlined China's aspirations for the local infant formula players on Monday.
"Encourage Chinese companies to buy foreign producers and set up production facilities overseas, so as to reduce cost of raw ingredients," the NDRC said, according to an English translation.
"Encourage Chinese companies to provide overseas and bring back in original Chinese branding. Encourage producers to broaden sales channels an differential to compete targeting the mid to high end market," it said.
The NDRC, which formulates and implements economic and social development strategies, proposed that financial incentives be offered to Chinese companies to consolidate and buy assets overseas.
It proposed initial public offers, capital raising support and tax concessions to achieve its aims.
New Zealand infant formula maker a2 Milk, for which China has been a big part of its success, saw its share price drop by more than 10 per cent on the back of the report.
A2 Milk, which boasts of market share of over 5 per cent in China, occupies the premium end of the market there.
Beijing-based David Mahon, a New Zealand businessman and consultant, said no regulations were in place yet, nor funds allocated, to achieve the NDRC's plans.
There is a 10-year old internal directive that dairy products be included alongside grains as part of China's strategy for food independence in a time of crisis, and the ministry of agriculture has been subsidising scale dairy farms, dairy processors and feed suppliers for years, he said.
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Much of China's policy emanates from the melamine infant formula scandal of 2008, which caused the deaths of six infants and made thousands more seriously ill.
"Agricultural officials in the Chinese Government still wince at the shame of the melamine crisis of 2008 and the fact that the loss of consumer confidence has never been regained," Mahon said.
A more robust local infant formula sector would recover some of the face lost a decade ago, he said.
China's domestic infant formula sector is improving every year in quality and is gaining local consumer acceptance, Mahon said, but it would be a some time before consumers with the means to purchase high-end imported product would switch to local brands.
"Any concrete policy to increase domestic infant formula production would benefit foreign suppliers of ingredients considerably for some years," he said.
China remains one of the most expensive countries in the world to produce liquid milk, let alone process it into formula.
It has seven per cent of the world's arable land and a fifth of the world's people, and the capacity of its animal husbandry sectors create more intensive farms, grow quality feed and the management of farm effluent is already stretched.
Mahon said China's latest moves should be seen against the backdrop of rising trade protectionism, led by the United States.
"With increased global protectionism and the US using tariffs so recklessly and randomly, it is understandable that China be concerned that it may be cut off from key imports, such as infant nutrition products," Mahon said.
Almost 70 per cent of China infant formula imports come from Europe, New Zealand accounts for 20 per cent and the US does not register as a supplier.
A2 Milk specialises in product that carry just the a2 beta protein. Standard milk has both the a1 and a2 beta proteins.
Mahon said A2 infant formula is a niche product that few companies supply globally, let alone in China.
China has yet to develop an A2 herd - animals carrying just the a2 beta protein - of any scale.
Mahon said a2 Milk's market position was secure form any domestic challengers," he said.
Oyvinn Rimer, Harbour Asset Management senior research analyst and long time a2 Milk watcher, said nothing fundamentally had changed for a2 Milk.
"For long term investors there is a lot of dust in the air. That will settle and we will see that again, the business is running pretty well," he said.
"China is interested in building trust in its domestic brands after the milk scandal a
decade ago," he said.
"This NDRC note reiterates that they are going to continue to back their domestic brands but ultimately, it's the consumer who decides."
Harbour Asset has a holding a2 Milk.
Who owns what
China already has a significant stake in the New Zealand infant formula sector.
• Bright Dairy has a 39 per cent holding in Canterbury-based Synlait Milk, which supplies a2 Milk.
• South Canterbury's Oceania Dairy is a wholly-owned unit of Shanghai listed Yili, China's largest dairy producer.
• In Southland, Mataura Valley Milk is majority owned by China Animal Husbandry Group.
• Yashili, one of China's top infant formula makers, has a state of the art infant formula plant at Pokeno.
• Yili is offering $246 million for cash strapped Hokitika-based dairy co-op, Westland Milk, which has formula making facilities.