The questions everyone is asking about new Chinese policies attacking private, listed companies is, why now, where will it end, and what does it mean for foreign investors?

UNSPECIFIED Soldiers of APL (Popular Army of Liberation) wriwriting messages of support for Mao ... [+] Zedong and the Communist Party on a blackboard in Beijing in June 1966. (Great Proletarian Cultural Revolution) (Photo by Apic/Getty Images)

The answers are generally political: Xi Jinping is eliminating all challenges to his power before next year, when he will actualize his promise to become ruler for life. Challenges to his power come from deep-pocketed private companies and the billionaires who lead them, hence the focus on the private sector. Wealthy state-owned corporations like China National Petroleum Corp. and China Mobile are firmly under Chinese Communist Party (CCP) control, and their resources can be freely deployed by the Party—no threat. An enduring feature of China's political economy, from the earliest imperial times through the early republic and CCP regime is that the top leaders actually own all assets. Political power and wealth are in the same strongman hands. It is unprecedented for China to have individuals outside the core power structure to have substantial material assets. 

There is plenty of disagreement about the nature of the current crackdown. Could China be angry about the U.S. entities list? About the demand that auditors approved by the Public Company Accounting Oversight Board (PCAOB) get access to Chinese companies? Is Xi intentionally punishing US investors looking for capital gains from successful Chinese enterprises? Is Xi feeling pressure at home from the fast-growing cohort of Mainland billionaires whose 'agenda' differs from his own?

Although U.S. belligerence is not irrelevant, neither is it the main event. Next year, China will convene its 20th Party Congress, marking Xi Jinping’s tenth year as general secretary of the Chinese Communist Party. Since Deng Xiaoping, who systematically brought younger people into government, had term limits written into the Constitution in 1982, the state chairman has been limited to 10 years. Deng, himself having been jailed by Mao in Mao's last, unpredictable years, famously said that China's most urgent need was to solve the "succession problem." At the last Party Congress, in 2017, Xi had Deng's 10-year term limit removed.

The Sunshine of Mao Zedong Thought Illuminates the Path of the Great Proletarian Cultural ... [+] Revolution, 1967. Private Collection. Strictly for Editorial use only. (Photo by Fine Art Images/Heritage Images/Getty Images)

Xi’s position in the CCP determines his singular political power; once the CCP secretary position was bestowed, his “election” by the National People’s Congress the following year to the position of “state chairman” (not “president,” a position that does not exist in China) was a mere formality. That is why 2022, the anniversary of the 18th Party Congress, and not 2023, when he assumed his role in the civil government, is what matters.

For those who have been paying attention, this was always going to happen. Firmly embedded in Communist Party ideology is the belief in history as dialectic progression from one “stage” to another, driven by social tensions that arise from the imperfections of the stages before communism—slavery, feudalism, capitalism. Communism is viewed as a nirvana-like end of history, in which material needs will be taken care of and people will be free to hunt, fish, and converse without exploitation. China’s “capitalist” stage, starting with the reforms of 1978, was intended to be temporary, as China marched inexorably toward socialism with Chinese characteristics. Now, capitalist mission accomplished, China is marching back to the closed-off era of the 1970s, when the only private companies were tiny fruit stands and dumpling vendors—nothing critical to the economy.

Portraits of Karl Marx, Friederich Engels, Vladimir Lenin and Joseph Stalin greet delegates to a ... [+] communist party meeting in China 1966. (Photo by: Universal History Archive/UIG via Getty Images)

It may seem quaint to suggest that CCP leaders actually believe in Marxism, probably the most definitively disproven economic theory ever created. But after all, the Republican Party believes in trickle-down, equally disproven. To borrow a Marxian idea, ideology is grounded in material incentive. The ideological argument, serving a continued monopoly on political power, is ex post facto. Chinese leaders of course have been steeped in Marxist theory since childhood but even more importantly, it behooves them to believe it to support their careers and personal fortunes: Marxism (at least the kind elaborated by Lenin) argues that only the CCP can lead China, and Xi Jinping, according to the last Party Congress, is the “core” of the CCP.

Key targets in the current campaign have been Ant Financial and Alibaba, Didi Global and WeChat, and the private tutoring companies. It seems likely that the particular bureaucratic goals are opportunistic: ministries are always interested in expanding their own remit, and some are also pursuing long-cherished goals under the cover of national campaigns. Those campaigns include lowering the cost of raising a child, reducing interest in studying overseas, minimizing (perceived) brain rot from gaming, lowering interest rates, keeping companies from loan sharking based on their access to spending data, and so on.

NEW YORK, NY - JANUARY 9: (L to R) President-elect Donald Trump and Jack Ma, Chairman of Alibaba ... [+] Group, speak to reporters following their meeting at Trump Tower, January 9, 2017 in New York City. President-elect Donald Trump and his transition team are in the process of filling cabinet and other high level positions for the new administration. (Photo by Drew Angerer/Getty Images)

The recent regulatory intrusions also impact efficiency, both for the companies being targeted and for society at large, as the ease of borrowing small amounts of money, for example, or hailing a cab is reduced. Reduced efficiency, a drag on public-market valuations, slower IPOs, a damper on venture capital and private equity—these are all unintended consequences.

Unlike, say, Russia, which is basically a Putin satrapy, China has an extensive, some say too extensive, government bureaucracy that only loosely answers to the CCP. A key goal of China's bureaucracy is to guard its power and guard against unintended consequences. Xi Jinping has done everything in his power since 2012 to “drain the swamp” and undermine bureaucracy in order to enhance his own power. When you hobble the bureaucracy and make yourself king, a lot of reactive stuff happens that you didn't think about.

What does all this mean for companies and investors? For companies, first and foremost is to take heed of Xi's recent demonstration that he can change long-standing ground rules in a blink. Another key takeaway is that bets must be hedged, currency repatriated, and value chains redistributed across the region. For two decades, China has been less important for cheap labor provided by the masses than for cheap capital provided by the CCP, also providing fast construction, speedy approvals, and lax environmental standards. All central policies favor the construction of capital-intensive facilities like ethylene crackers, aluminum smelters, and semiconductor fabs. These facilities are hard to move. But companion facilities—for instance, PVC plants, factories making aluminum cans, or semi packaging plants—can be moved to mitigate risk.

BEIJING, CHINA - OCTOBER 25: Chinese President Xi Jinping speaks at the podium during the unveiling ... [+] of the Communist Party's new Politburo Standing Committee at the Great Hall of the People on October 25, 2017 in Beijing, China. China's ruling Communist Party today revealed the new Politburo Standing Committee after its 19th congress. (Photo by Lintao Zhang/Getty Images)

For portfolio investors, the issue is always how to assess and put a price on risk. Xi’s maneuvers ahead of the next Party Congress do not mean that China is off the financial map, but a hefty risk discount should be applied to its traded companies. That is, after all, how capitalism works. To do otherwise is to live too deeply in the China dream.