By intern reporter Liang Dongmei

The Inner Mongolia Autonomous Region has promised 100 million yuan in assistance for two of China’s largest dairy food companies – Yili Group and Mengniu Group – as regional governments step up support for an industry shaken by a nationwide scandal over contaminated milk.

Regional authorities said additional subsidies for the companies would be offered to cover losses incurred between September 20 and October 10. Moreover, Caijing has learned that the regional government has asked the central government in Beijing for permission to exempt Yili and Mengniu from taxes for the next four months.

The crisis, which began when thousands of babies suffered kidney ailments after drinking chemically spiked milk, has forced Yili and Mengniu to cut purchases from dairy farmers, trim production and watch their sales plunge.

The companies’ combined losses are expected to top 3.6 billion yuan in the next four to five months, the regional government said.

Government investigators found melamine, an industrial chemical that causes kidney troubles, in products sold nationwide by 22 companies, including Yili and Mengniu.

Inner Mongolia is particularly sensitive to milk companies’ woes. Over the past decade, the dairy industry has grown to become an economic pillar and major tax source for the region.

Yili and Mengniu alone directly employ more than 100,000 people and indirectly account for another 1 million jobs nationwide, according to the regional government. A collapse of these companies would “trigger a series of social issues,” the government said.

Inner Mongolia’s bailout plan follows industry rescue efforts announced by governments in other dairy regions, including the provinces of Hebei, Shanxi and Liaoning, each of which recently promised subsidies for dairy farmers hard hit by the crisis. Farmers nationwide have been forced to dump tons of fresh milk, and many have been unable to sell enough milk to cover daily feed costs.

As of September 22, combined orders for Yili and Mengniu products had fallen more than 80 percent, while their daily purchases of fresh milk fell 82 percent to 3,672 tons, a government report said. Business nose-dived after the companies were forced to recall 6.4 billion yuan worth of products nationwide as of September 19, the government said.

It was a dramatic turn for Mengniu, which posted first-half 2008 sales of 13.7 billion yuan, and Yili, which reported 11.5 billion yuan in sales for the same period.

Investors have punished Mengniu (HKSE: 2319), whose trading was halted September 18. Its share price plunged more than 60 percent when trading resumed September 23.

Trading in Yili (SSE: 600887) was suspended on September 19. The company’s share price fell 9.97 percent on September 23.

1 yuan = 14 U.S. cents