Wang Liming, director of the MIIT's consumer goods department, said Mengniu will become a pillar group in domestic production of formula, which contributed only 1 percent to the company's 2012 revenue of 36 billion yuan ($5.84 billion).

Yashili, which is based in south China's Guangdong province, saw its sales of milk powder grow 29 percent year on year to 3.13 billion yuan in 2013. Only two domestic enterprises sold more milk powder in the 12 months.

It has several factories producing formula in China and secured approval last December to build a factory in New Zealand.

Demand for infant formula is booming in China, but trust in domestic producers has been hammered by a 2008 milk scandal. Six infants died and 300,000 were sickened after consuming baby milk tainted by melamine.

Chinese people living in the mainland have since flocked to Hong Kong and other markets to buy foreign-brand baby milk powder.

Sales at Mengniu, China's biggest dairy company, fell 3.5 percent between 2011 and 2012.

The company has been trying to rebuild its image by buying into more reliable businesses. It teamed up with Danish-Swedish dairy group Arla Foods in June of 2012 to develop dairy products.

In another bid to regain consumer confidence on May 21, it announced an investment by French dairy group Danone, the world's largest yoghurt maker, which will set up a joint venture with Mengniu for the production and sale of yoghurt in China.

Zhu Hongren, the MIIT's chief engineer, said the quality of Chinese dairy products has largely improved but it will take time for consumer confidence to recover.