China's demand for imported cotton is being squeezed by fears that Beijing will issue fewer import quotas this year, prompting mills to hold off on orders, traders say.

The world's top buyer of cotton will halt a three-year stockpiling programme in the 2014/15 season, replacing it with a subsidy for farmers in its biggest growing region of Xinjiang.

The new policy - officially confirmed this month, although few details have been decided - has stirred concerns that China will want to encourage consumption of its huge domestic stockpile of fibre at the expense of imports.

China's cotton reserves are expected to reach 12.7 million tonnes, equivalent to almost 60 percent of global stocks, after its third year of buying ends in the next few months.

"There is a fear that with so much in reserves, how will China issue more quota?" asked Gao Fang, secretary-general of industry body the China Cotton Association.

China has already issued part of the 894,000 tonnes of the 1 percent duty import quota it is obliged to offer under WTO commitments, but how much is not clear, with estimates ranging from a third of the figure to almost all.

But China typically also offers several thousand tonnes more under higher tariffs, calculated on the basis of a sliding formula. Many mills fear that with so much cotton in reserve, the government will cut back on quota releases.

"People are just using the WTO quota to cover nearby demand. They're not inclined to look forward due to lack of clear policy expectations," said one trade source, who asked not to be identified because of the sensitivity of the subject.

"Mills that have operations outside China are buying. The businesses with destination to China are holding out," said another trader.

Mills had stepped up purchases for December delivery to use up last year's quotas ahead of expiry, pushing total imports to 609,000 tonnes, or about 3.5 times November volumes of 173,000 tonnes. Abundant cheap Indian cotton also contributed several thousand tonnes of imports.

Indian cotton is expected to keep imports high in January, but arrivals will start to drop off from next month, said traders, only picking up later in the year if China releases additional quotas in March and April.

That will keep imports for this year well below the 4.4 million tonnes brought in during 2012/13, with estimates pegged from 2.4 million tonnes to 2.8 million tonnes.

Beijing may be keen to offer import quotas in return for purchases from its stocks, however, as it did last year. It gave out import quotas of about 124,000 tonnes to mills which bought cotton from the reserves during the 2012/13 marketing season.

"I believe there is a strong urge for Beijing to de-stock," said one of the trade sources.

Without offering quotas, demand at reserve sales would be tepid, sources said. Auctions begun in November have only shifted 404,000 tonnes, or 38 percent of volumes on offer, despite prices dropping below 17,000 yuan ($2,800) per tonne.

That price is 17 percent less than the reserve's current purchase price, but more than 50 percent higher than the most-active March cotton contract on ICE Futures.

"You're still paying a substantial premium (on international prices) to buy from the reserves, even if they cut their prices," added one of the traders who sought anonymity to protect business interests.

In the absence of sufficient import quotas, mills could turn to yarn instead. Imports of yarn - not restricted by quotas and subject to low import duties - reached a record 2.1 million tonnes in calendar 2013, up 37.5 percent on the year. ($1=6.0508 Chinese yuan)