Chinese officials launch 'witch hunt' amid financial market paranoia

The Shanghai Composite Index has plummeted 37 percent since June, due in part to a period of weak economic data and Beijing's recent currency devaluations. In an attempt to rescue their economy, China's government is now treating investment firms with the same suspicion and scrutiny with which they have traditionally policed their political dissenters. "They seem to be harassing anybody that they thought was selling or was short," one Hong Kong hedge fund manager told The New York Times. "Hello, it's a hedge fund — they are long and short — but China is only looking at the short side."

Nearly 200 reporters have been punished by a special police campaign for "spreading rumors," according to the Times, the most notable of which was financial journalist Wang Xiaolu, who was detained by police and later made to apologize for an article the government believed had the potential to further damage the market. Other instances include police officers downloading trading data, or telling fund managers to stop selling.

Li YiFei, the chief of the world's largest publicly traded hedge fund, vanished for a short period of time, though she denied it was due to police detention, despite widespread skepticism of her alibi. In another instance, a Hong Kong based hedge-fund manager told the Times he was cashing out of close to $500 million invested in mainland China, citing his fear of "the witch hunt that is going on."

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"There is, generally, a very nervous atmosphere, as people wait to see the outcome of some of these investigations and how deep the rabbit hole goes," Effie Vasilopoulos, a partner at the Hong Kong office of the Sidley Austin law firm, told the Times. "How wide a net is the government going to cast in terms of looking at foreign firms and their operations — not just onshore, but also offshore as well?"