An Australian dairy company has had its licence suspended in China, and Beijing has "strengthened supervision" for all 41 other exporters, in a blow to producers already battling low prices.
At the centre of the dispute is the Camperdown Dairy Company which has been accused of having "disease causing" bacteria in its fresh milk, a charge the company strongly denies.
According to a notice posted on a Chinese government website, shipments of Camperdown's fresh milk contained traces of E.coli and staphylococcus.
"That is just not true," said the general manager of Camperdown Dairy, Chris Melville via phone.
"If that type of bacteria had been found in our milk we would have been informed straight away and this is the first I'm hearing about it.
"We have test results to prove it is not true."
Mr Melville said the federal government had confirmed to him the company had no "food safety issues".
A spokesman for Agriculture Minister Barnaby Joyce said he department was working with Chinese authorities to investigate reports of non-compliance for nine Australian pasteurised milk batches in the last 12 months.
"It is important to note that the non-compliances related to milk quality issues, not food safety issues," the spokesman said in a written statement.
He said it was the Department of Agriculture and Water Resources which suspended export certification for pasteurised milk products produced by Camperdown Dairy.
The singling out of the entire Australian dairy industry for additional "supervision" could be highly damaging for producers given the sensitivity of Chinese consumers to any suggestion of contamination.
China is the second largest export market for Australian dairy producers with trade valued at $295 million in the 2015 financial year.
The Australian Embassy was informed of the additional scrutiny last Friday and on Tuesday notices were put on government websites.
On Thursday news of Camperdown's suspension and increased supervision of the Australian industry was posted on the official Xinhua newsagency and quickly picked up by other news sites.
Mr Melville said Camperdown voluntarily took itself off the China export list as it was waiting to provide authorities with further test results on the shelf life of its fresh milk.
Prime Minister Malcolm Turnbull arrives in China on Sunday.
The Turnbull government has protested loudly over Beijing's aggressive pursuit of its territorial claims in the South China Sea and in recent months has rejected two major Chinese investment proposals in Australia.
