The foreign passports belong to governments that've issued them and so the people that've
been issued those documents may have been terrorized by the local authorities
there

Interesting argument for foreign residents of Xinjiang. But this fact certainly justifies the Chinese government holding Chinese citizen passports, since China owns them.

Foreign visitors routinely need a special resident permit to reside in Xinjiang. I suspect that they are now being advised at the time of applying for the residence permit that they must surrender their passport to the local police if they choose to reside there.