Sept. 13 (Bloomberg) -- China reported 432 cases of infants with kidney stones caused by melamine-tainted Sanlu Group Co. milk powder and said authorities are investigating problems with the company's products that first surfaced in March.

Sanlu, 43 percent owned by New Zealand's Fonterra Cooperative Group Ltd., has been ordered to stop all production and its formula products have been recalled. The government has also ordered an investigation of all milk-powder producers nationwide to check for melamine, officials said at a press conference in Beijing today.

``We will try to find the loopholes and problems in supervision'' that allowed this to happen, said Gao Qiang, vice minister of health, who is leading an inter-ministry group investigating the issue. ``This reminds us that the supervision of food quality cannot be accomplished overnight.''

The recall and health warning suggest that a government campaign to improve food safety, triggered by export scandals last year, hasn't closed the gaps in the system. Melamine, a white crystalline compound used to make plastics and in tanning leather, was found in exported pet food last year and blamed for killing thousands of cats and dogs in the U.S.

Gao admitted that the company started receiving complaints from consumers in March and confirmed the melamine contamination after an internal probe in August, a month before the recall issued earlier this week.

Hebei Investigation

Authorities in Hebei province, where Sanlu is based, have detained 19 people and questioned 78 others, and are investigating whether government bodies or officials knew about the problems and helped to delay exposure, said Vice Governor Yang Chongyong.

Milk sellers dilute milk with water to increase inventory, and then use melamine, which mimics protein, to boost the apparent protein content, Gao said.

The problem may stem from cost pressures combined with government price-caps, according to Steve Dickinson, a partner at law firm Harris Moure Plc who has studied China's food safety system. The Chinese government has limited price increases of staple goods, including milk products, this year to reduce the impact of inflation on consumers.

``These companies aren't really permitted to price their products at a commercially reasonable price,'' Dickinson said in a telephone interview from the eastern Chinese city of Qingdao. ``Yet their superiors are beating on them to make money. Melamine allows them to get higher-rated protein content at no extra cost.''

Food Safety Efforts

Dickinson added that so far, the central government's efforts to improve food safety haven't filtered down to the local level.

``They haven't found a way to make it work,'' he said.

Thirteen babies died of malnutrition in 2004 and almost 200 were hospitalized in eastern China's Anhui province that year after being fed substandard milk. The milk powder, labeled with false information, had no nutritional content, causing infants' heads to swell while their bodies starved, according to Chinese media reports at the time.

One baby died of kidney stones caused by drinking Sanlu milk powder, according to the Xinhua News Agency. Officials today did not report any deaths. Babies with the ailment, rare in infants, have been reported by at least seven provinces since June.

Inspectors don't routinely check for melamine, according to Pu Changcheng, vice minister of the General Administration of Quality Supervision, Inspection and Quarantine. The government plans to investigate all dairy producers for melamine, including 175 infant formula makers.

To contact the reporters on this story: Dune Lawrence in Beijing at dlawrence6@bloomberg.net; Luo Jun in Shanghai at jluo@bloomberg.net.

Last Updated: September 13, 2008 09:37 EDT