"Rule of law" means that the law is above the government; the government is constrained by the law. This means that there is a common understanding about what the government can and cannot do. China has "rule by law"; that is, the government is above the law. But if the law is arbitrary, how can anyone trust you?

Rule OF law means that, at some level, I protect your interests (because I am forced to by the law). Rule BY law means I do whatever I want. You can't fully trust someone who is only committed to their own interests. Trust happens when I know that you will look out for my interests. Deep trust happens when I know you will look out for my interests even if it costs you.

If China's rulers think it will keep the Party in power, they won't hesitate to devalue their currency, or set an arbitrary exchange rate, or limit the amount of money foreigners can exchange, or any numbers of other things that could cause problems for a company holding a large amount of RMB. Imagine you sold $100 million of goods in RMB, and you have $95 million in expenses in USD. Great, convert RMB -> USD, collect $5 million in profit! But one day, you wake up to discover that the currency is worth 10% less than yesterday, or now there is a rule that you can only take $500 out of the country per day. In the first case you now have a $5 million loss, in the second case you have a cash flow problem. Not the kind of thing I look for in a reserve currency.

Is the US any better? There are so many vague, complicated, broad and contradictory laws that the government can do anything it has decided and find justification for it SOMEWHERE.

Edit: Talking strictly about constraints put on the government.

It is not static, hence why it is linked to being a level of trust. While this can happen in the US, its rare to happen at the federal level without some sort of check/balance. On the other side, arbitrary application of law is the routine system of governing at all levels in China. One type you can mostly trust, especially if history tells you how the pattern plays out. The other side there cannot be any trust.

In a business contexts, rule of law is mostly useful for predictability.

Much as he annoys me a lot of the time, Niall Ferguson's Reith Lecture on this topic is worth a listen - http://www.bbc.co.uk/programmes/b01jmx0p

Mr. Ferguson is brilliant when discussing history, but his economic prognostications are wanting.

What exactly are you not following? You think that there is supremacy of the law in China?