China's central bank has raised the re-discount rate from 2.16 per cent to 2.97 per cent to stem illegal fund flows into its highly speculative stock markets. The change, effective since September 11 but announced just yesterday through the China Securities newspaper, was the first re-discount rate rise since March 1998. 'The rise is mainly aimed at standardising the commercial paper market and adjusting the interest-rate structure,' China Securities reported, quoting an official. 'It doesn't signal a tightening of the monetary policy.' Beijing has been pursuing a combination of expansionary monetary and pro-active fiscal policies to stimulate domestic demand and maintain a high economic growth rate. Further rate increases would also counter a global trend. In the wake of the September 11 terrorist attacks on the United States, the US Federal Reserve and many of the world's other central banks cut rates. Banks buy financial instruments from cash-strapped businesses for less than the principal repayment due on maturity. Re-discount refers to the central bank's purchase, at a discount before maturity, from other banks of financial instruments already discounted. In developed economies the central bank uses the discount lending rate as an effective tool of monetary control. However, given the small commercial paper market in China the rate hike would have limited impact on the overall monetary base, said analysts. At the end of last year the People's Bank of China's (PBOC) outstanding re-discount business was a meagre 125.8 billion yuan (about HK$117.9 billion), even after a 1.52 times growth from the previous year. Since March 1998 the PBOC has cut the re-discount rate four times - most recently in June 1999 when it was slashed to 2.16 per cent from 3.96 per cent. They were intended to encourage commercial banks to expand their commercial paper business. However, officials now blame the low discount rates for intense competition between smaller commercial banks which paved the way for some businesses to obtain funds for stock market speculation using fake papers. PBOC has been probing commercial banks for such irregularities after a string of stock manipulation scandals came to light. In July PBOC disciplined four commercial banks for their lapses and promised tighter money market regulation. Yesterday, analysts disagreed on the effectiveness of the rise in reducing illegal bank funds in the stock markets. Goldman Sachs' head of Greater China economic research Fred Hu Zuliu said it could send a wrong message that the central bank is tightening monetary policy. A senior analyst at the Shenzhen-based China Communications Securities, Peng Xiaoquan, said the rise would work as a 'transitory measure' given the negative sentiment. Stocks have hit a 15-month low amid ongoing clamps on irregularities.