The evil spirits were the unfortunate souls of the emperor of China's victims. They were ordered to construct the emperor's massive tomb and were buried alive after its completion. Some more evil spirits were also present at the Temple of Kong Tien.
The spirits came in three forms: the more common yellowish spirits that attack by flying through Indy or sapping his energy, the blue spirits who inhabited near the Emperor's crypt that either attacked by firing balls of electricity or summoned the yellow spirits, and red colored ones whom Indy doesn't fight but are seen near the Emperor's body. The yellow spirits also inhabit the dead bodies of Triad fighters or Terra-Cotta statues and use them to fight Indy.
The spirits could be defeated by the Pa Cheng, a mystical weapon Indy found in Kong Tien's temple. It takes one hit for the yellow spirits and two hits for the blue spirits.
The red spirits were responsible for briefly reviving the emperor's body to attack Indy after he retrieved the Heart of the Dragon. The emperor displaced the spirits and became dead once more. After Marshall Kai was defeated, the red spirits believed him to be the emperor and dragged Kai to the underworld to be eaten by a dragon.