Small and medium-sized baby formula exporters say China is pushing them out of business.
Chairman of the Infant Formula Exporters association, Michael Barnett, said the Ministry of Primary Industries (MPI) is to blame because its let the Chinese set the rules.
Danone's Nutricia infant milk formula on sale in Beijing. Photo: RNZ / Demelza Leslie
Chinese companies are benefiting from rules introduced in May last year in the wake of the 2013 Fonterra botulism scare according to Mr Barnett.
The new rules require infant formula exports to be made by manufacturers accredited by China and Mr Barnett said the first five registered manufacturers are now in Chinese hands which means many small exporters can no longer obtain product to export.
"The Chinese started purchasing these manufacturing companies, that they now control control the distribution channel into the China market and I've seen another of small exporters go belly up," he said.
Increasingly infant formula is being sold to China in bulk and Mr Barnett said the number of baby formula cans exported halved last year because the distribution channels are now controlled by Chinese agents.
The ministry must take the initiative, and not let China set the rules Mr Barnett said, with the accreditation process controlled by New Zealand.
Beijing-based investment advisor, Rodney Jones, said Fonterra's botulism false-alarm had hurt New Zealand.
He said the Free Trade Agreement with China is open to review and New Zealand should take advantage of that to re-negotiate the rules governing infant formula.
"In the re-set on the FTA, infant formula is an example of something that should be on the top of that, where we shouldn't have smaller companies put at a disadvantage by a regulatory structure in China."
Chinese food companies were also expanding overseas to gain more control over food being sold in their home market, which remained wary of local products, Mr Jones said.
And he said they were gaining increasing control of the New Zealand industry.
China's two big dairy companies Yili and Mengniu, both state-owned, are building large factories here.
The Ministry for Primary Industries said the number of infant formula brands applying for certification to export to China had dropped by almost two-thirds since December 2013.
The ministry said in response to the regulations, many manufacturers had chosen to reduce the number of brands they are willing to make under contract to such companies.
The number of applications has dropped from about 150 to 40.
Agribusiness specialist Keith Woodford said the Fonterra botulism scare is partly to blame for the tougher formula export environment.
Professor Woodford, honorary professor of agri-food systems at Lincoln University, told Morning Report there are dozens of companies in the infant formula business and China wants that reduced to just ten, so it can better regulate and monitor the industry.
Wall Street Journal correspondent, Andrew Browne, who was in New Zealand this month, said this country faces a choice.
"Is it going to invest more in value-add or is it going to be content to do what it's done for so many years, which is essentially ship unprocessed, vast amounts of raw milk powder?" Mr Browne said.
Mr Browne, who lives in Shanghai, said he was surprised during his visit here by the scope, the scale and speed of Chinese investment in New Zealand.