For years Hong Kong prided itself on running the freest market in the world--a loving monument to the virtues of capitalism. That love has turned to dismay recently, as the once-bustling territory has been buffeted by the financial crisis plaguing the entire region. And to ease the pain, Hong Kong has turned to some rather meddlesome means.

On Aug. 14, a day after the Hang Seng stock market index closed at a five-year low of 6,660, authorities bought up an estimated $385 million in local blue-chip stocks to prop up the faltering market. Over each of the next 10 business days, they continued to purchase shares, spending an estimated $15 billion by the end of last week. On Friday alone, fighting to punish speculators who had bet against the share index, authorities were forced to lay out at least $8 billion. The action held the Hang Seng to a 1.2% drop on a day when markets around the world headed south. But in what has long been considered one of the freest market economies in the world, the administration's unprecedented tactics have raised serious questions. Says Andrew Ballingal, a director at Schroders Securities Asia: "It's a desperate measure for a desperate time."

Government officials say that hedge funds--which they lambaste as cold-blooded speculators--forced their hand. The multibillion-dollar funds, the officials complain, are engaged in a form of high-stakes cherry-picking: first they take positions betting that the stock index will fall, then they mount furious attacks on the Hong Kong dollar. The currency, which is pegged to the U.S. dollar, cannot fluctuate widely in value. Instead interest rates rise to make holding Hong Kong dollars more attractive; with the cost of borrowing raised, share prices fall, thus rewarding the speculators' original bets. The funds claim they are only responding to overvalued assets and currency. Authorities say their moves are creating a self-fulfilling prophecy.

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