It has been rasterized inside the smart object, because you saved it in a raster file.
So Photoshop doesn't care that the elements within the smart object are individually not raster objects?
What is the point of that? That doesn't seem like the expected behavior.
Is there a way to make this work? (I know I can open the smart object and make it big and save it. But then I have to guesstimate how large it needs to be rather than being able to dynamically adjust scale with the transform tool.)
Are there any other (better) workarounds?