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China’s Response to Stock Plunge Rattles Traders

The police have been dropping in on investment firms and downloading their transaction records. Senior executives at China's biggest investment bank have been arrested on suspicion of illegal trading. A business journalist has been detained and shown apologizing on national television for writing an article that could have hurt the market.

The Communist Party's response to China's months long stock market crisis has been swift and forceful. In addition to spending as much as $235 billion to buy shares and bolster prices, the authorities have imposed a range of extraordinary restrictions on the sale of stocks — and backed them with the full weight of a security apparatus usually more focused on political dissent than equity trades.

After decades of watching China make slow but steady progress in building Western-style financial markets, many are now asking whether the party is reversing course — and whether Chinese officials are willing to tolerate the sometimes turbulent waves of selling that are inherent to such markets.

"What's happening in China is definitively spooking people," said Dawn Fitzpatrick, the chief investment officer of O'Connor, a $5.6 billion hedge fund owned by UBS. "They've set themselves back a couple of years" in terms of attracting investment, she added.

Anxiety in the industry surged last week after Li Yifei, the prominent China chief of the world's largest publicly traded hedge fund, disappeared and Bloomberg News reported that she had been taken into custody to assist a police inquiry into market volatility. Her employer, the London-based Man Group, did little to dispel fears, declining to comment on her whereabouts.

Ms. Li resurfaced on Sunday and denied that she had been detained, saying that she had been in "an industry meeting" and "meditating" at a Taoist retreat. But many in the finance sector are unconvinced.

"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," said Effie Vasilopoulos, a partner at the Hong Kong office of the Sidley Austin law firm who works with hedge funds that invest in mainland China. "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?"

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