I agree, and you don't even need China in this analogy. Suppose that 5 of the best blacksmiths leave the blacksmith cooperative and start producing custom-made

I agree, and you don't even need China in this analogy. Suppose that 5 of the best blacksmiths leave the blacksmith cooperative and start producing custom-made nails for less than the old blacksmith coop, which by the way is now missing their best people. What happens when they take over the market? Will the now-jobless blacksmiths be accepted as members of other cooperatives with full rights, or do they need to sell their labor in the market for whatever someone is willing to pay? The only way so far found to preserve socialist principles in this situation is with regulation which prevents free economic choice - the bootmakers don't get to choose whose nails they buy, you can't quit your job with five of your friends and start a competing concern, and you don't get control over who you let into your cooperative. But having removed this right to dispose of the results of one's own labor (I am not even talking about hired labor), we've created a state-run society in practice if not in theory.