I just returned from several days in Shenzhen in southern China. This is only my second visit to China, and I find it a confounding country.
The Chinese people seem to be very entrepreneurial, always looking for opportunities for profit and willing to start new businesses at the drop of a hat. The Chinese government appears to encourage this behavior, giving the impression of supporting, even nurturing, capitalism.
But everywhere you look, you see the economic inefficiencies of the communist system of government. For instance, the way I got into Shenzhen was to fly to Hong Kong, then I took a bus across the border into China. Of course, at the Chinese border, I got off the bus, went through passport control, then reboarded my bus on the other side of the border. I thought that was it and we would then drive right into Shenzhen.
However, when we got to the edge of Shenzhen, the bus stopped again and they checked papers again. They seemed more concerned with the Asians on the bus than westerners like myself, and I asked my Chinese host what was going on. He stated that Shenzhen is a special economic zone and that Chinese citizens from other parts of the country were not allowed to enter without the proper papers.
I don't know what criteria they use to define that permission, but any artificial barrier to the flow of labor capital (or currency, or information, or anything else) means inefficiencies and inequities to me. (Can you tell I'm a free trader?)
Other examples of labor inefficiencies were everywhere. The new, modern, beautiful hotel where we stayed had a spa that covered one floor, with a pool, workout room, and spa service rooms. At the pool, there was a "California Juice Bar," where a woman stood ready to serve up smoothies. However, I never saw anyone in the pool the whole time I was there, but she stood there at her bar all day long.
Another example was the woman whose job seemed to be to clean off the tops of the stone benches in the formal garden across the street. That's all she did, all day, every day that I was there. How can that be a good use of the labor resources?
These are the kinds of stories we used to hear about the old USSR, and we know its fate. If China somehow manages to smoothly transition away from centralized planning to true capitalism, they will be a formidable economic power. But they need to remove these types of artificial barriers, and it's hard to see how they can do that and remain consistent with communist rule.