China monthly review: September, the month of the milk crisis

A month after having organized one of the most spectacular Olympic Games in history, China was again faced with one of its most serious problems: the poor image of its products, which was further damaged by the case of the contaminated milk.

The milk contained melamine, a highly toxic chemical, and resulted in the deaths of four babies in China, and became an international issue when its dairy products were exported. It only reached scandal status when it was learned that one of the companies involved, the New Zealand firm Fonterra, had warned about the contamination.

On the other hand, China experienced a small dip in its economy just when the global financial crisis began to take a turn for the worse and the stock markets had begun to drop.

In early September, it was reported that that 14 babies in Gansu province were sick and suffering from kidney stones. The death of one of the affected infants further aggravated the situation, leading to an investigation into the milk powder produced by Sanlu Group. It was discovered to be contaminated with melamine, an industrial chemical used in the manufacture of plastics, which makes the milk appear to be much higher in protein than it truly is.

The New Zealand dairy cooperative Fonterra, which holds 43% of the shares in Sanlu Group, had warned the producers as early as August that they should withdraw the contaminated milk from the market. In fact, the New Zealand’s Prime Minister Helen Clark contacted Beijing to warn the company and authorities about the contaminated milk.

By mid-August 69 lots of milk from 22 different companies were found to be contaminated with melamine. Several other products such as ice creams, yogurts and liquid milk, also showed the deadly chemical. At that point, 6200 babies were sick and four had died.

To make matters worse, the products were exported to Bangladesh, Yemen, Gabon, Burundi and Burma. Against this backdrop, the Chinese government described the milk market as chaotic and acknowledged the error in monitoring, in addition to arresting 22 individuals who were involved in the scandal. Li Changjiang, head of the General Administration of Quality Supervision, Inspection and Quarantine, submitted his resignation as required by the State Council.

The scandal continued to grow. Hong Kong ordered all dairy products produced in mainland China off the shelves, as did other Asian and African nations. The European Union placed a ban on all baby products imported from China, which might contain traces of milk powder, while announcing that all food from this country would be examined. This is because Europe does not directly import products from China, but other foods that may contain Chinese ingredients.

In Chile, teams from the Ministry of Health visited all the places where Chinese products might have been marketed, checking the more 60 thousand pounds of Chinese products that were imported between January and July this year. The only company that imports dairy products from China to Chile is Ghosh Tkas Ltda. In addition, some sweets produced with milk, whose origin was identified as Chinese, were seized, whereas it was considered that they represented a potential risk.

It seems the milk incident opened to further questioning of the ethics of the Chinese companies. According to an employee of a foreign company that produces baby products in China, the problem in China is not its laws, because they are very strict. The issue is corruption. Chinese companies often can find ways to skirt laws.

The Chinese government had to face another complex issue this month. It recognized the possibility that some of the schools that collapsed during the Sichuan earthquake, killing thousands of children, collapsed because the materials and construction were not strong enough. By admitting that there might have been flaws in construction, the government took a share of responsibility in one of the worst tragedies in China in recent years. It also gave consolation to thousands of infuriated parents who have been pleading for a response.

All this happened in the backdrop of the sub prime crisis and the impending fall in the stock markets. China began the month with negative numbers. The first day of September its stock market fell 3% after first-half corporate profits confirmed the slower growth of the economy.

The Shanghai Composite Index rebounded by 8% on September 22, thanks to authorities deciding to launch a plan that allows state-owned enterprises to buy their own stock without government approval. This intervention is designed to enhance confidence in domestic stocks, which have fallen by 50%, compared to their highest point in October 2007.

The growth rate of Chinese industrial sector was the lowest in six months, which were pummelled by the temporary closure of some plants during the Olympics.

Meanwhile, the government saw a return on their economic policies.  On many occasions it has increased interest rates and reduced banking funds available for businesses. It did this in order to reduce the rate of growth of the country due to fears about an economic overheating. However, this month required an opposite tactic, when its central bank dropped interest rates by 7.4% to 7.2% for the first time in six years due to the growing problems in the global financial market.

As for the Chilean-Chinese economic relations, during September it was revealed that the Asian giant has become the largest destination for Chilean forestry shipments, surpassing the United States.  According to its lumber trade association, Corma, Chile’s exported forest products to China totalled $517 million during January-July 2008. This represented 16% of Chile’s total exports. This month the US imported $420 million, or 13%, and Japan with 8% and $259 million, placed third.