The National Development and Reform Commission and several other government departments have released a plan to develop the domestic milk powder sector, with measures in place to improve quality and meet the demands of consumers.
The plan encourages greater competition in the industry, with domestic companies encouraged to cooperate with institutes to boost research and innovation in the development of better quality products.
Smaller companies will be encouraged to merge, while domestic companies will be supported to buy or develop farms overseas to reduce costs, according to China Daily.
Foreign firms will also be encouraged to play a bigger role in the sector, with the NDRC calling on more overseas enterprises to set up joint ventures in China to increase supply to the domestic market.
The NDRC expects domestic production to account for more than 60 percent of the total supply to the market, while also "significantly improving" consumer confidence.
Domestic firms currently account for around 40 percent of the market, with many consumers still leaning towards foreign brands after the 2008 tainted milk scandal led to the deaths of several infants and poisoned thousands of others.
Following the release of the NDRC's plan, shares in foreign milk powder suppliers and producers fell, amid concerns that they would lose lucrative market share in China.
Sydney-listed a2 Milk saw its share price fall 8.6 percent on Tuesday, while Bellamy's Australia fell 5.3 percent.
