CHINA will shut down small dairy makers and lift the threshold of new market players as part of its tightened supervision to prompt the dairy industry's healthy development and global competitiveness.

Small dairy manufacturers with backward technologies and high energy consumption will be eliminated, the National Development and Reform Commission said in an industrial guideline posted on its Website.

The industry-wide reshuffle is expected to lead to 2.5 million tons of dairy production to be cut by 2010 and an estimated 6 million tons to be reduced by 2012, the statement added.

Besides the removal of underdeveloped dairy production, companies which have plans to enter the dairy industry will be asked to have net assets no less than twice as much as the proposed investment in new dairy projects.

They also need to be profitable for at least three years with a debt rate of no less than 70 percent in addition to their own raw milk bases.

"The industrial policy is posed to blind and repeated investment in the dairy processing projects in order to avoid overcapacity, waste of resources as well as vicious market competition," the top planning body said.

Analysts said the introduction of the outline will benefit the expansion of big dairy companies for a more efficient economy of scale and would help to avoid disorder market competition.

"The prolonged outline will prevent small companies from entering the market and support the formation of industrial powerhouses through mergers and acquisition," said Tang Zhiqing, an analyst from Yi Yan Consulting.

"Chinese dairy makers need to be sizable when the overall industry is transforming from extensive economy to intensive economy."

NDRC said China plans to form big dairy product manufacturers with annual sales of more than 2 billion yuan (US$288 million). It will be encouraged to raise money through stock listing and cooperate bond issues in addition to financial support from government banks.