Am i correct in that category folders are meant to be used for this?
If so, i propose a way to customise the label and name ot the category folder.

For example, if two dogs are to be connected to a litter as their parents, it would be nice to have the labelname of the category row in the form to be like 'Parents' instead of 'Dogs'(Contentfolder name) and being able to replace the name category with a set name like 'Parent' in this example.

This would make it much more visually appealing.

That the content foldername is used is kind of the problem. The name of the related content can change depending on the application. Another example:

You want to setup an index of people. So you create a content type named Person. Then you create a content folder named People.

In the form for every person you create you would like a relation to two other persons in the People folder. These are the Persons parents.Therefor you add a categoryfolder in People pointed to itself.

The above will result in a categoryfolder in the form named People. But the name should be Parents, not People. Otherwise the content managers will not understand what its for. And when the content managers click on the 'select' button it will say 'Select category' wich is also confusing. Since they are not selecting categories, they are selecting parents.

This is just an example and functinally it works fine. Its just that not being able to control the presentation labels of category folder will make it hard to present it in a way that users and content managers will understand.

yes, it is sub content relationship.