In thinking about the current Chinese milk scandle, the reference that comes to mind is Edward G. Robinson's movie, "Brother Orchid," about a gangster who hides out in a monastery, and while there, improves their dairy's milk production by adding buckets of water to the milk.
The difference is that Little Johnny Sarto never added anything poisonous to the milk to hide what he had done. Unfortunately, in the modern-day version of this story, that's exactly what was done. Perhaps they got the idea from the melamine-laced gluten scandal that killed a lot of pets. It's hard to believe they didn't think it would ever come out.
So why add melamine to watered-down milk? According to ScienceBase, Melamine is an organic compound, with a high nitrogen content, used in fire retardants because its nitrogen is released as nitrogen gas when it is burned.
Acute exposure to melamine can cause cancer or reproductive damage. But even low-dose but chronic exposure to melamine can lead to bladder or kidney stones, bladder cancer and kidney failure.
According to this article in the Christian Science Monitor, the scandal points out a problem in Chinese business ethics or the business culture, probably akin to things that used to go on in the U.S., and one could say, probably still are (the reluctance of the government to ensure that the beef industry has instituted safe practices against Mad Cow disease for example).