* Toxic heavy metal found in capsules in China
* Drugs scandal latest in a series including toxic clothes, milk and toys
* Manufacturers under pressure to produce low-cost drugs
By Donny Kwok and Tan Ee Lyn
HONG KONG, June 18 (Reuters) - Hou Zhihui breaks open a cold-medicine capsule, pours the powder on to a piece of steamed dough and folds it together. He passes the miniature bun to a colleague who pops it in her mouth.
That is his response to the discovery of 77 million capsules made of industrial gel containing chromium, a carcinogenic heavy metal, the latest in a series of safety problems blighting China's healthcare industry, including the widespread manufacture of fake drugs.
The government has repeatedly promised to tighten regulatory systems after safety scandals involving fish, drugs, toys, toothpaste, children's clothes, tyres, drugs and milk fortified with melamine, used in the manufacture of tabletops. But little has been done apart from a few, highly publicised arrests.
"I read about the capsule problem ... the next morning, a colleague of mine had a cold, so I thought of a way for her to take the medicine," Hou said.
China announced in May that 254 pharmaceutical suppliers, or 12.7 percent of the total, were producing tainted capsules. At least 10 are listed or linked to China-listed firms, according to the official Chinese media. Of 11,561 batches of drugs tested, 5.8 percent contained excessive levels of chromium.
Instead of using gelatine derived from animal parts, they used cheap industrial gelatine from leather scraps treated with chromium that tans and softens animal hide.
The problem is pervasive because of the pressure to produce low-cost drugs and still make a profit, and the popularity of traditional Chinese medicine, which is often made into powders and packed into capsules.
Authorities swooped in on 236 capsule makers, ordered 42 of them to stop production, closed 84 production lines, revoked the licences of seven companies and referred 13 to the police.
HEALTH IN JEOPARDY
As China revamps its healthcare system to make it more affordable to its 1.3 billion population, bureaucrats have gone all out to lower drug prices in large drug tenders that give winners a captive market spanning several provinces.
Toxic capsules have also been uncovered in Hong Kong, where drugmakers source 90 percent of their capsules from China.
"The current tendering system of the essential drug list has three major problems: first, essential drug tendering in provinces has become a political competition to depress prices among local governments, which results in constant decreases in prices of some essential drugs," the Chinese Pharmaceutical Industry Association said in a report.
"The unreasonably low winning prices directly challenge the safely bottom lines of the essential drugs, put Chinese people's health in severe jeopardy and affect normal production and supply of these essential drugs."
Analysts say the cutting of corners won't go away overnight.
"It will continue to haunt the market as long as enterprises have to make a profit," said Gideon Lo, analyst at Nomura Equity Research in Hong Kong.
"Consolidation must happen and is already happening. It will be good if we can see the number of pharmaceutical makers coming down to 1,000 (from over 6,000) in the next five years."
As for breaking open capsules and taking their contents separately, experts say that is dangerous, assuming the toxic capsules work, as they should, on a timer.
"The formulation of some drugs is prepared for sustained release, meaning the drug is prepared in a way to release the drug slowly," said William Chui, president of the Society of Hospital Pharmacists of Hong Kong.
"If you break the capsule, you destroy the mechanism of sustained release. The drug will immediately be released and you risk increasing the drug level in your blood and developing side effects." (Additional reporting by Beijing Newsroom; Editing by Nick Macfie)