Vitamin maker Blackmores suffered its biggest intraday fall on Tuesday – plunging as much as 20 per cent in early trade – after falling 13 per cent on Monday. Chinese authorities late last week published a "positive list" of goods allowed through cross-border trade in piloted free trade zones. The list did not include milk powder but vitamins and infant formula were approved.

Blackmores' share price rebounded in afternoon trade, but other stocks that were lauded as market darlings due to their high valuations and exposure to a rapidly growing market, were lower on Tuesday, including Bellamy's which closed 11 per cent lower and A2 Milk, down 6.5 per cent.

Investors have been quick to hit the sell button, fearful of policy changes that appear to restrict the cross border trade of products such as infant formula and vitamins, which have enjoyed a surge in demand on the back of the growing Chinese middle class, Prime Value Asset Management joint chief investment officer ST Wong said.

"It creates doubt to the perpetuity of the growth, in this case of Chinese demand," he said. 

'Jumping at shadows'

But the numbers tell a different tale to what one fund manager described as a "jumping at shadows" reaction by the market.

Morgans analyst Scott Power said the Chinese market for infant formula and vitamins and minerals was worth $US20 billion ($26.2 billion) each.

"So there is a big opportunity for Australian manufacturers to continue to win market share in this large market," he said in a note to clients.

Chinese consumers were still likely to buy through e-commerce channels, where a new 11.9 per cent tax has been imposed on foreign commodities, because it was still cheaper than buying in a bricks-and-mortar store, he said. Demand is also expected to remain strong in "grey" channels as well.

"On [e-commerce platform] Tmall a tin of Bellamy's formula sells for about $50 compared to circa $80 in the mother and baby stores in China," Mr Power said.

"While sentiment may be against these companies, we think that over the medium term, patient investors will be well rewarded as we expect these companies will continue to report strong earnings growth for many years to come."

JP Morgan analyst Russell Gill said his firm did not expect any regulatory announcement would change the demand for foreign goods by consumers.

"The route to the customer may change – as well as the price the consumer pays – which could impact near-term sales but the longer term thematic remains in place," he said.

The regulatory changes introduced levelled the playing field for all foreign products, and Mr Gill said a bigger issue would be an Australian dollar that returned at US dollar parity or higher. 

"It is also important to highlight that Australia and China are expected to implement the Free Trade Agreement in 2018 which should see the tariffs on a number of products reduced to zero - vitamins and supplements are included in this agreement," he said.

Mr Wong said in any case, investors would want transparency in the distribution channels to regain some comfort with the changes.

Too risky

But the threat of a crackdown was too high for Wilson Asset Management, which sold out of Blackmores and A2Milk earlier this year.

"We thought the potential risk around upcoming regulatory changes in China was too much of an overhang, too much of a risk to hold them," chief investment officer Chris Stott said.

He said the risk around further changes was high relative to the price of the stock. Blackmores shares hit an all-time  high of $220.90 on January 4. On Thursday the tightly held stock was buying $165.

"I think the incredible uncertainty around the Chinese regulation will remain and will create some volatility for some time to come," Mr Stott said.