Under the control of the Chinese Communist Party (CCP) there is no rule of law. Executives of foreign corporations and investment firms that invest in China must know this fact. Yet so many have taken the risk, enticed by profits and confident they can stay in the good graces of the ruling dictatorship. But how safe are investments in China? At what point will foreign corporate leaders realize they have fallen into a trap?

That trap is the shifting landscape of Chinese policy and law, which the CCP manipulates to ensnare unsuspecting enterprises. Though domestic companies frequently fall prey, corporations from outside that are used to operating under the protective umbrella of a commonly understood legal playbook are particularly vulnerable.

Unlike in the U.S. and other societies governed by the rule of law and independent judiciaries, the CCP has long relied on a combination of policy and laws to maintain control of the nation and ensure its privileged position of power. The party can arbitrarily decide when policy follows the law, or when the law follows policy, according to its needs. When it wants to have policy as the presiding force, the law will be nothing more than scrap paper. But when the party wants to punish opponents or stifle foreign companies, it will pull out every crime on its books to repress dissent while painting an appearance of legality over what is in fact wanton repression—or outright theft.

This dynamic has been consistently at play ever since the China entered the World Trade Organization in 2001. Intent on attracting foreign investment, the CCP leadership pretended to enact reforms the West has come to expect: written laws which they don't actually follow, held elections that amount to a rubber stamp of single-party candidates, and launched public "anti-corruption" campaigns which are actually targeted purges of individuals who threaten the dictatorship. These things play well in conversations with foreign leaders and executives, but most recognize they are a sham.

At the same time, the CCP gave a green light to all levels of authority—from the central and provincial down to local leaders—to offer privileges and policies to entice overseas investment. Such policies have included reduced or no taxes (for instance, three years with no tax followed by five years of heavily reduced rates); preferential pricing on real estate; below-market rates for land leases; expedited mortgage approvals; and simplified administrative procedures, to name just a few of the advantages designed to spur engagement in China.

However, unpredictable shifts in geopolitics, domestic economic concerns, and suspicion toward companies that become too big or too influential can trigger changes, and what once looked like solid ground—with contracts and agreements—is now a sinkhole. This is the trap: privileges bestowed by local policy are suddenly declared in violation of Chinese law.

When the CCP changes its mind, the locally delivered "preferential policies" are suddenly not only obsolete but illegal. What looked like a great deal was in fact part of the policy trap. But at that point it's too late for regrets. The laws only benefit the CCP; any existing contracts taken to court are as good as blank.