SYDNEY, Feb 21 (Reuters) - Chinese cotton buyers are buying up Australian product in anticipation the unofficial ban that decimated Australian cotton exports to China could lift amid a diplomatic thaw that has already seen trade resume in other sanctioned commodities.

Australian cotton is being shipped to a bonded warehouse in Qingdao and possibly one other location, by the Australian subsidiary of China National Cotton Group Corporation, one of the biggest state-owned Chinese cotton buyers, CNCGC Australia merchant Tom Zheng told Reuters.

If the unofficial ban lifts, the cotton can be sold into the lucrative Chinese domestic market, he said. If not, companies in the duty free zones can use the product for re-export.

"It's not a complete gamble because there is consumption in China in duty free zones," Zheng said. "We expect the relationship to improve and the ban will be lifted."

A trader who spoke on condition of anonymity said Australian cotton had been moving into China for months and small shipments had already cleared customs.

Once the biggest market for Australian cotton, the A$900 million ($620.28 million) trade ground to a halt in late 2020 after China imposed a series of official and unofficial restrictions that also hit commodities like coal and timber.

China imported 20,000 tonnes of Australian cotton in 2022, compared to 400,000 in 2019, according to Chinese customs data.

But the diplomatic thaw following a meet between President Xi Jinping and Prime Minister Anthony Albanese last November has already seen trade restrictions on coal partly lifted.

Cotton Australia chief executive Adam Kay said he had heard Chinese merchants were entering May forward contracts for cotton. In the event that trade remained blocked, they would move supplies elsewhere, he added.

"We've still got contact with spinning mill contacts in China and they'd love to have access to our high quality cotton again," he said.

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