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.Either way the administration of Chief Executive Tung Chee-hwa was unwilling merely to watch things deteriorate further. After its buying spree last Friday, the government confirmed that the territory has slipped into a full-blown recession, with its economy shrinking 5% in the second quarter. Authorities now predict a 4% contraction for the year. Unemployment is approaching 5%, and property values are down about 40%. Those who support the interventions claim Hong Kong has every right to defend local investors from the depredations of greedy foreigners. There is a sense that this is no longer a colony, that this is a government with a responsibility to protect its people, says Eugene Galbraith, managing director at ABN AMRO Asia.As one prominent Western analyst acknowledges, the behavior attributed to the hedge funds would be considered unfair market manipulation in the U.S., and hence illegal. Even many who are dismayed by the government's bristling rhetoric concede that if the ploy works--if speculators decide to cut their losses now rather than gamble that authorities, who are working with $69 billion in available reserves, cannot sustain their defense--then the intervention will have been validated.But the moves have compromised the Hong Kong market's reputation for openness. On Friday Financial Secretary Donald Tsang warned that the government would soon introduce measures to restrict investors' ability to bet against the market. Analysts fear that even without such controls, investors will be loath to return to the Hang Seng, fearing that its stocks are overvalued. This could pose a problem for the government, which now reportedly owns an average of 5% in several of the territory's largest companies. The holdings raise serious conflict-of-interest questions, since government regulations also affect the prices of those shares. Yet the authorities cannot easily unload them. At one point last week, when the government's brokers stopped buying shares, the Hang Seng plummeted 300 points within minutes. If anything, the government's actions have only strengthened speculation in some quarters that the Hong Kong dollar's peg to the greenback will eventually be abandoned. Interventions in general are designed to create an orderly price adjustment, says Jan Lee, chief economist at Hongkong & Shanghai Banking Corp. You can effectively buy time to create some order, but there is no way you can buy good fundamentals with money.Tsang claimed victory on Friday, declaring: We have frustrated the [speculators'] plan. The war, however, is not over: many funds have rolled over their August positions to September, and perhaps most importantly, as Quantum Fund director Stanley Druckenmiller said in an interview on CNBC, When they wake up on Monday morning, [Hong Kong is] still going to be in a depression. The same circumstances that forced the government to act may ultimately doom its expensive efforts.Reported by Mishi Saran/Hong Kong