China, the world's biggest cotton consumer and importer, is studying a proposal to issue extra import quotas for textile mills which have been pushing the government to boost the amount of cheaper overseas cotton they can buy, industry sources said. If approved, the quotas will require mills to buy three tonnes of cotton from state reserves for every tonne they import, said the sources who declined to be named as they were not authorised to talk to the media.

It is not clear if these imports quotas would be a duty free basis or on a sliding tariff system. Any increase in imports from China could boost US cotton prices, as the United States is the largest exporter of the fibre to China. Foreign cotton supplies can cost as much as 40 percent less than local cotton, whose price is boosted by the government's stockpiling policy.

"We don't expect the import quotas to be very big volumes. It is compromise by the government to help quieten down complaints by textile mills," said Jian Jinglei, an analyst with Shanghai CIFCO Futures. "The government does not need to issue extra import quotas as its stocks are equivalent to about one-year consumption." China issued import quotas for more than 3.7 million tonnes in 2012 at sliding tariffs of 5-40 percent. State cotton reserves are expected to rise to a record 8.6 million tonnes by the end of the 2012/2013 cotton stockpiling program in March.

In a bid to ease prices and increase supplies, the top planning agency, the National Development and Reform Commission (NDRC), said in a statement dated December 28 that it would sell an unspecified amount of cotton from its reserve. It gave no further details. China began its cotton stockpiling programme in 2011 to support local farmers. The government buys cotton at a premium to market prices, a policy which has sucked supplies out of the domestic market and forced textile mills to rely on imports.

Only a limited number of mills, however, are allocated import quotas, which means the majority have to pay expensive domestic prices, making them uncompetitive. Companies that can import cotton also often sell their purchases to other mills at a huge profit, adding to the cost burden for textile mills. China's cotton imports in the first 11 months of the year 2012 jumped 79 percent compared to the previous year to a record 4.6 million tonnes.