What is Beijing so afraid of? Master Li, as he is known to his devoted followers, may be wacky, but he’s no counterrevolutionary. The dumpy, soft-spoken spiritual guru, whose principles are taken from a blend of Buddhist, Taoist and mystical beliefs, preaches “truth, benevolence and forbearance.” He also believes, among other things, that aliens inhabit the earth, and that he can give his followers a “celestial eye” with supernatural powers. But to Beijing’s leaders, the sudden rise of Falun Gong is a nerve-racking reminder of the Communist Party’s weak spots. In the ideological wasteland of China’s money-hungry society, the party no longer serves as a moral rudder. That might not be so scary to the leaders if they weren’t wrestling with explosive economic reforms. Soaring unemployment and a crumbling health-care system are fueling discontent–and sapping the party’s credibility. The crackdown “shows just how fragile and frightened the government is,” says Boston University Sinologist Merle Goldman. “This is not a strong regime.”

Not that the government is about to fall. But to leaders paranoid about potential unrest, the sheer number of Li’s followers–as many as 70 million in China, he says, more than the Communist Party itself–and their proven ability to organize large-scale protests have set off alarms. According to Beijing, Falun Gong had 39 “master stations” and 1,900 “branch stations” across China. The media blitz harked back to the Maoist mind-control campaigns of the 1960s. In one horror story, a teenage follower of Falun Gong killed his parents with a footlong knife because he thought they were demons. In another, a retiree cut off his genitals because he believed that would stop him from attracting electromagnetic waves from other planets. Another man disemboweled himself because he was trying to remove the cosmic “Wheel of Law” that Master Li had allegedly planted in his abdomen. In a self-criticism reminiscent of the Cultural Revolution, a local Falun Gong leader publicly recanted: “I am upset because I have destroyed many happy families by training them in Falun Gong.”

The party sent hundreds of its own members who had practiced Falun Gong to re-education seminars. Not to be outdone, the People’s Liberation Army reported that a “vast number” of soldiers were “studying theories, refuting fallacies, distinguishing between right and wrong and fostering healthy trends in light of realities.” Beijing blocked access to Falun Gong Web sites.

The first bolt of fear surged through the party on April 25, when more than 10,000 Falun Gong practitioners quietly surrounded Zhongnanhai to complain about a critical magazine article. Prime Minister Zhu Rongji met with Falun Gong representatives on the spot and was stunned to find among them party cadres, reportedly including an official from the State Security Ministry. “The government isn’t opposed to qigong,” he reportedly said. “But you can’t come here like this. You must leave.” After an all-day meeting, according to an informed source, the protesters melted away as quietly as they had come. President Jiang Zemin reportedly was irate. He fired off a midnight letter to key Politburo members, fuming, “I can’t believe Marxism cannot triumph over Falun Gong.”

Zhu’s critics can easily use his meeting with Li’s aides against him. Falun Gong may have become fuel in a leadership tussle that has been brewing in recent months. In a recent interview with NEWSWEEK, Li pointed out that Zhu hasn’t publicly opposed his movement. He’s the only top leader who has bantered with representatives of the now illegal organization. Zhu is already on the defensive politically: in May, he failed during a visit to the U.S. to extract an agreement from Bill Clinton on terms for Beijing to join the World Trade Organization. The NATO bombing of the Chinese Embassy in Belgrade was a setback for Zhu, whose economic reforms depend on close ties with the West. Last week, in yet another bad sign for Zhu’s political future, one of his proteges, Zhu Xiaohua, abruptly resigned his position as head of a top Chinese enterprise. Rumors are swirling that the executive is the subject of an investigation into financial irregularities. Zhu Xiaohua’s successor said the transfer was “normal.”

In early August, the leaders are scheduled to mingle at the seaside resort of Beidaihe. Reform of state-owned enterprises and China’s entry to WTO–both Zhu’s crusades–were initially at the top of the agenda. Now the ideological crackdown is a hot subject too. As the leader who looked soft on the Falun Gong supporters, Zhu is vulnerable. The crackdown is not only a distraction from important economic reforms, but could also scare off much-needed foreign investment. “It’s clearly a blow to Zhu to have all this happening,” says a Western diplomat in Beijing.

As if to highlight his priorities, Zhu has been flying around to visit victims of this year’s annual floods. Some flood victims even reportedly believed that Falun Gong could help them survive underwater. Zhu last week praised emergency efforts by the People’s Liberation Army. On television, victims joined his chorus. “Only after the water came up to our a–es did we realize Li Hongzhi wasn’t going to rescue us,” a farmer named Li Guangyun told reporters after he resisted rescue for two days hoping Falun Gong would save him and his family. “Now we know only the PLA can be our saviors.”

Following the crackdown, will Li’s followers survive underground? With no extradition treaty between China and the United States, Li can continue to lead his movement from New York. As many as 70 leaders who were arrested the first night face investigation and probable trial. Others could also face sanctions ranging from expulsion from the party to loss of jobs or even stints in a labor re-education camp. Many Chinese are quietly resisting the most extreme aspects of the crackdown. “I’m going to keep the books in order to study them and find their mistakes and educate my family,” says one Beijing Yuppie whose relatives are Falun Gong practitioners.

Beyond the cosmic realm of Falun Gong, the leadership is most concerned about signs of resistance within the ranks of the party. Jiang reportedly hit the roof after learning that some local authorities were dragging their feet in cracking down on the group. The movement seems to already know how to operate clandestinely. “Why does it claim to have no organization when it’s organized just like a political party?” one senior cadre reportedly asked. That’s something the communists, who began underground themselves, know all about. “They have seen the enemy,” says one Western diplomat in Beijing, “and it seemed like them.” Before the crackdown, Li was concerned only with his extraterrestrial powers. Like it or not, he now has become a more earthly political force, too.