A total of 426 dairy producers will be shut down and another 107 will have to suspend operations following a quality watchdog inspection.
Just over half of the producers inspected had authorized licenses and these were granted permission to continue operations, a senior quality inspection official said.
Li Yuanping, spokesman for the General Administration of Quality Supervision, Inspection and Quarantine (AQSIQ), the industry watchdog, said at a news conference in Beijing on Saturday that 643 dairy producers, 55 percent of 1,176 nationally registered, passed the AQSIQ inspection.
Of the remaining 533 that failed to meet requirements, 426 face permanent closure, while 107 were told to suspend operations until they carried out improvements, Li said.
In response to a call to ensure the safety of dairy products from the State Council, China's cabinet, the AQSIQ issued a regulation in November requiring dairy companies to reapply for production licenses by the end of March or face suspension.
In 2008, baby formula tainted with melamine and industrial chemicals killed at least six infants and more than 300,000 children suffered kidney ailments.
The scandal led to growing concerns over the quality of dairy produce, in particular baby formula. As recently as February, there were media reports that dairy products containing leather-hydrolyzed protein, a banned additive, were still being sold in markets.
"The local bureaus are working on revoking production licenses for the 426 that are disqualified," Li said, adding that suspended producers are in danger of permanent closure if they did not carry out urgent improvements.
The AQSIQ has demanded that its local bureaus enhance supervision. "Any unlicensed production center will face harsher punishment in future," Li said.
Most of the infant formula producers, 114 out of 145, passed the inspection, he said.
The AQSIQ listed the names of all dairy producers on Saturday that passed the inspection on its website.
The November regulation included a stipulation that dairy companies must maintain appropriate equipment to test for additives. A national license review was launched in January.
"The review aims to push forward large-scale production and improve the quality and safety of dairy products," Zhi Shuping, AQSIQ director, said at a national conference in January. Small plants with low quality standards and poor production facilities would be shut down, he said.
Song Kungang, chairman of the China Dairy Industry Association, said the closures amounted to about a quarter of all dairy companies.
Only 30 percent of dairy companies in Yunnan province had their licenses renewed, while only 19 out of 35 passed the test in Zhejiang province, according to a report by Xinhua News Agency. It also reported that 26 dairy companies passed in Beijing while nine failed.
Wang Dan, a manager in the marketing department of Beijing-based Sanyuan Foods Co, a dairy producer, told China Daily on Saturday that her company had their license renewed long before the deadline and she did not believe that the closure of smaller firms would affect it.
"Industry tycoons dominate 80 percent of the market, after all," she said.
"But it's a positive move in regulating the industry."
Duan Hongli, who owns a dairy company in Xi'an, Shaanxi province that failed the test, told the National Business Daily that the reason it failed was because it could not raise enough funds to purchase proper additive-testing equipment.
Liu Jingjing, a 29-year-old Beijing mother, said she will choose foreign infant formula over domestic brands to feed her four-month-old daughter for a "well-known reason".
The demand for foreign baby formula has risen sharply in China over the past two years from just 40 percent of market share in 2008, to almost half in 2010.
Sang Liwei, a food-safety lawyer in Beijing and a representative of the Global Food Safety Forum, a non-government organization, told China Daily that he was surprised that nearly half of the companies failed.
"I hope the suspended firms resume operations again because it harms customers when so many companies vanish overnight," he said adding that he believed the failure rate would have been about 20 percent.
"It's unfortunate to see some small dairy producers with quality products eliminated," said Wang Dingmian, former chairman of the Guangdong Provincial Dairy Association.
