Sept. 18 (Bloomberg) -- China's quality watchdog today raised the bar on food safety, revoking a special status that's helped some producers avoid inspections, as a scandal involving chemical-tainted milk powder spreads.

The government will immediately cease bestowing ``inspection-free'' status on food producers, ordering them to stop citing the privilege in advertisements, the Administration of Quality Supervision, Inspection and Quarantine said on its Web site today.

China's three largest dairy producers pulled their milk powder from store shelves nationwide, as Premier Wen Jiabao ordered an overhaul of the country's industry. At least two producers, China Mengniu Dairy Co. and Inner Mongolia Yili Industrial Group Co., enjoy exemption from government inspection on some products, enabling them to develop new yogurt flavors and blended-milk products without having to undergo inspections.

At least four infants have died and more than 1,300 have been hospitalized after drinking milk formula that's been contaminated with melamine, a toxic chemical normally used in making plastics and tanning leather. Up to 18 people have been arrested in connection with the widening scandal, exposing the deficiencies in the campaign to improve product safety and restore public confidence in the Made-in-China brand.

``This is not a situation of somebody innocently cheating just to try to make a little more money,'' said John Eldred, managing partner of law firm Keller and Heckman LLP in Shanghai. ``They are doing it with an eye toward knowing they are cheating and knowing they are risking the health of the people who are using their products.'' The Washington-based firm specializes in food and drug regulation.

Fourth Death

The Xinjiang provincial government in northwestern China today reported that an infant's death was linked to melamine- tainted milk, the fourth known casualty since the scandal erupted on Sept. 10.

Yili, Mengniu and Bright Dairy & Food Co., China's three biggest dairy producers by value, recalled milk powder tainted with melamine and apologized to customers in separate statements. Yili and Bright Dairy shares plunged today in Shanghai trading.

``Yili removed the whole of its tainted batch from the market as soon as possible and it's no longer for sale,'' the Hohhot, Inner Mongolia-based company said on its Web site. ``We are deeply sorry for the effects on consumers.''

Hong Kong authorities pulled all Yili products from retailers' shelves after testing showed that eight of 30 items contained melamine, Constance Chan, controller at the city's Center for Food Safety, said at a news briefing today.

The food-safety center is speeding up testing of other mainland dairy products, she said.

Overhaul the Industry

Chinese Premier Wen yesterday ordered an overhaul of the dairy industry, firing officials and forcing 22 companies found with contaminated products to recall milk powder.

Melamine can be used to disguise diluted milk because it makes protein levels appear higher than they really are, allowing producers to cut costs by watering down their products.

The chemical was found last year in pet food exported to the U.S., blamed for killing thousands of cats and dogs. Earlier this year, pesticide-tainted Chinese dumplings sickened at least 10 people in Japan. Mattel Inc. last year recalled 21 million Chinese-made toys because of excessive lead content.

Yili shares tumbled for the fifth consecutive day in Shanghai, plunging by their 10 percent daily limit to a 12-month low. One batch of Yili's milk powder among 35 tested by government labs was found to contain melamine, the company said.

Bright Dairy shares fell 3.5 percent to close at 4.07 yuan. The Shanghai-based company recalled batches of products under two brands that were tainted and apologized to customers, according to a statement on its Web site yesterday.

Recall, Apology

Mengniu yesterday issued a product recall and an apology on its Web site and asked the Hong Kong stock exchange to suspend trading in its shares pending the release of an announcement about its milk products. The stock, which has dropped 5 percent since the government announced a probe into infant formula on Sept. 10, last traded at HK$20 on Sept. 16.

Ji Chuntang, mayor of Shijiazhuang, capital of Hebei province, became the latest official to be fired in the scandal, the official Xinhua News Agency said late yesterday. The city is the base of Sanlu Group Co., 43 percent owned by New Zealand's Fonterra Cooperative Group Ltd. Sanlu's milk powder, sold in China at less than half the price of comparable products by Yili and Mengniu, was found to contain the highest levels of melamine.

Ji was also removed as vice secretary of the Shijiazhuang Communist Party committee, the report said, citing an unidentified spokesman for the party committee of Hubei province. It didn't say why he'd been fired. Ji is the fifth city government official to lose his job since Sept. 16, Xinhua said.

People Arrested

Shijiazhuang authorities have arrested 18 people in connection with the addition of melamine to milk, including 12 workers and managers from milk collecting stations and six others who sold melamine illegally, the Hebei government said on its Web site today.

So far, the local government has seized 300 kilograms (661 pounds) of chemicals, including 223 kilograms of melamine as part of their investigation, the Web site said, citing Shi Guizhong, the provincial government spokesman.

Sanlu Chairwoman Tian Wenhua was detained by police, another Web site run by the provincial government said yesterday. She was also fired and removed from her post as the secretary of the corporation committee of the Communist Party of China, according to the official Xinhua News Agency.

To contact the reporter on this story: Lee Spears in Beijing at lspears2@bloomberg.net.

Last Updated: September 18, 2008 06:21 EDT