China will pay farmers subsidies of 2,000 yuan ($330) per ton of cotton harvested this crop year outside its top producing region, potentially slowing a drop in output in the world's No.1 consumer of the fiber and further curbing demand for imports.

Traders said that while the amount was less generous than a subsidy scheme in the main production area, Northwest China's Xinjiang Uyghur Autonomous Region, it was in line with expectations as the country abandons a years-long stockpiling program that had reduced supply and bolstered global prices.

An end to that buying and the switch to subsidies has seen US prices drop to five-year lows over market fears of weaker demand from China amid plentiful global supplies.

"[The new subsidy] will probably mitigate the decline in cotton production in eastern China, but I would still expect production to drop somewhat," said a trader in China who declined to be identified due to the sensitivity of the matter.

"Without this subsidy it probably would have collapsed," the trader said.

The new subsidy will be available to growers in the provinces of Shandong, Hebei, Henan, Jiangsu, Anhui, Hubei, Hunan, Jiangxi and Gansu, the China Cotton Association said on its website, citing details from a government meeting held on Tuesday.

Subsidies had initially been planned only for Xinjiang, which accounts for more than half of China's cotton production, leading analysts to predict a sharp drop in cotton output in the country.

Reuters