This is Bright Dairy's second scandal in a fortnight after it had to recall batches of sour milk last week. Its shares were trading down 0.5 percent, and have lost 9 percent since the sour milk recall.

China's milk industry is struggling to restore consumer confidence after a series of scandals, the worst of which was in 2008 when milk and infant formula laced with the industrial chemical melamine killed at least six children and made nearly 300,000 ill.

The Shanghai Daily said the dairy firm will face penalties for changing its formula without authorization and that all supermarkets and convenience stores in the city have been told to remove the cheese product from their shelves.

A spokesman for Bright Dairy and representatives for the Shanghai government were not immediately available for comment.

The additive is not allowed for babies as it is a newly extracted compound that may have unknown effects on infants, the report added.

The paper quoted Bright Dairy as saying that the ingredient was added before the ministry adopted new regulations in 2009 and that the product is not meant to be only for babies despite the packaging. The company plans to put the product on the market again in October with clearer labelling, the report said.

(Reporting by Carrie Ho, David Lin and Melanie Lee; Editing by Kazunori Takada and Edwina Gibbs)

• A Permanent Economic Emergency