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Is China going to stop the grey import of baby formula and vitamins?

Australian-made vitamins, supplements and baby formula has been a huge success in China over the past year or so, turbo-charging revenues and the share prices of a number of companies.

In particular, vitamins and supplements supplier Blackmores Limited (ASX: BKL), baby formula producer Bellamy’s Australia Ltd (ASX: BAL) and A2 Milk Company Ltd (Australia) (ASX: A2M) have all seen revenues and earnings soar, followed by their share prices.

In the past 12 months, Blackmores share price is up nearly 200%, A2 Milk a similar 190%, while the Bellamy’s share price has boomed nearly 350%.

But the astonishing growth in sales could be about to come to an end.

Late last year, the Chinese government announced draft laws to tighten restrictions on imported food being sold to consumers via websites or social media accounts based offshore.

This affects the companies above because a large number of intermediaries have been buying their products in retail stores in Australia, selling them online through popular social media sites and then mailing them to Chinese consumers.

That is why a number of retailers including supermarkets Woolworths Limited (ASX: WOW) and Coles – owned by Wesfarmers Ltd (ASX: WES) were forced to impose limits on the number of tins of baby formula customers could buy in one purchase.

The Australian Financial Review (AFR) also reports that Chinese consumers prefer to buy them from offshore – even at higher prices – rather than locally and directly from the manufacturers, because they believe there is less chance of the product being tampered with or are fake.

If the draft laws are imposed, tougher checks are likely to be imposed at Chinese mainland ports, Chinese labelling could be required and higher food safety protocols.

Veteran fund manager Geoff Wilson is so worried about the regulator that he has sold out of both A2 Milk and Blackmores believing they could be vulnerable to any crackdown on ‘grey’ imports.

That could restrict the flow of ‘grey’ or imported Australian-made products, but it also offers an opportunity for the manufacturers to capture more higher-margin sales. All three companies sell their products legitimately in China already.

Foolish takeaway

Mr Wilson may be right in the short term if the draft laws are enacted and grey imports into China restricted. But Chinese consumers still have an insatiable appetite for high-quality Australian products particularly baby formula, vitamins and supplements – which is unlikely to disappear.

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Motley Fool contributor Mike King owns shares of Bellamy's Australia. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. You can follow Mike on Twitter @TMFKinga

The Motley Fool Australia owns shares of Bellamy's Australia. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.