petty officials who are little removed from the warlords of the early 20th century

Yeah, that's what I was characterizing, imperfectly, as “feudalism”. The upward mobility issue is an interesting one since that's been a feature of the Chinese system for a very long time and one that most Westerners are peripherally aware of at best.

By now, though, it seems all but certain that the melamine was added to make up for the fact that most Chinese milk is heavily cut with water to increase profit. This is pretty common; most Chinese milk is watery and lacks the cream and fat of American or European milk. From what we've seen so far, "contamination" in Sanlu's stocks seems too thorough to be anything but deliberate. The jury's still out on Mengniu and Yili, the other big companies pinpointed in the probe.

In the comments, Dave and DC Loser I'd say you're both partly wrong. China is neither laissez-faire nor is it feudal.

Laissez-faire, as an ideal type, requires a strongly developed sense of trust and rule of law, it cannot exist in omnia bellum contra omnes conditions like those in most of China. Likewise, it's not a true feudal situation, as the economic actors in question are independent rather than subservient, plus there is upward mobility for anyone who can scam enough or bribe enough to get there. What we're looking at instead is a kind of gangster capitalism practiced in the periphery and among the underclass, aided and abetted by petty officials who are little removed from the warlords of the early 20th century.

Trust in China, or the lack thereof, remains the great obstacle to steady development. If you only trust your family (and this is the bottom line for Chinese), you expect others to exploit you, so in this situation you jump ahead of the pack to exploit before you're exploited. That's what the farmers were doing when they sold watered-down, melamine-filled milk to dairy companies.