This is so wrong on so many levels.  The Korea Times (May 7, 2012) reports:

Health authorities have launched an intensive crackdown on traffickers of Chinese-made capsules made from dead human babies.
[...]

The capsules are made of powdered dried fetuses or dead babies. Believed to help in rejuvenation, they are used by terminal cancer patients or Chinese laborers working here, according to the customs office.

The main production centers are Yanji, Jilin, Qingdao and Tianjin, China; and one capsule is sold for 40,000 won in Korea.
[...]

Some put herbs together in the capsules so that customs agents cannot distinguish the unique smell and color of the human-flesh capsules. Others put the capsules in medicine containers to deceive inspectors,” a KCS official said.

But apparently this is not new news.  The Shanghaiist reported in August last year that SBS aired a documentary (I admit I did not watch it but here is supposedly the video as I am pressed for time) discussing this gruesome issue.  Here is Shanghaiist’s google translation of part of that program (note that the San Francisco IB Times, August 5, 2011, has a similar translation):

The television team also reportedly uncovered the process by which the dead baby pills are made. Supposedly, the medicine companies store the dead babies in a “normal family’s refrigerator,” so as to be undiscoverable, and when they are ready to use the dead baby, they put it into a medical drying microwave. Once dry, they grind the dead baby up and put the powder into a pill capsule.

Health Freedom Alliance notes that even this incident (SBS report) was not the first allegation made against China:

In 1995, U.S. Representative Frank Wolf asserted that he had credible reports of the same exact practice listed above. He called for the Clinton administration and human rights groups to investigate and take action, but nothing became of it.

The Chinese government last year was supposedly investigating the accuracy of the SBS video and China Daily (August 10, 2011) reported:

A professor at the Third Hospital of Jilin University said he has never heard of such cases in his two-decade career.

“It’s hard to comment, because it looks like a rumor,” said the professor, surnamed Zhang. “This is impossible from my professional judgment.” 

Three traditional Chinese medicine experts and obstetrics doctors in Beijing and Shanghai contacted by China Daily said they have never heard of such cases and it seemed senseless. 

It has long been a folk tradition to eat placentas in China. Placentas are believed to make up sperm and support the sufficiency of blood in traditional Chinese medicine.

 Apparently the smugglers are “members of the Korean ethnic group in China.”