Rolls Royces, Bentleys and Porsches glide down the streets without raising an eyebrow. Multimillion-dollar villas built around the famous West Lake sell for more than 50,000 yuan per square metre.

Shopping is a serious business. Built in the mid-1990s and located 2km from the lake, Wulin Square is home to Lane Crawford and the Hangzhou Tower mall, with 40,000 square metres of space that houses brands such as Dior, Cartier, Ferragamo, Salines, Hugo Boss and Louis Vuitton.

The tower attracts 30,000 to 50,000 visitors a day and reported sales last year of 1.8 billion yuan, putting it among the top five department stores in the mainland.

Taxi drivers swap stories of the opulence of their customers. 'I had a woman who told me she spent 50,000 to 70,000 yuan a month at Lane Crawford and thought this quite normal. She must be the wife of a tycoon,' said one.

'Private wealth is accepted here and a sign of your success. If you are poor, it is because you have no ability,' said another, who could name the owners of most of the city's biggest private conglomerates.

'From 1957 to 1979, if you engaged in private business, the Party arrested you,' said the owner of a tea shop close to the lake. 'But not since then. I drive a Mercedes and feel quite safe. Of course, we have kidnappings and murders but, overall, public order is good. Private entrepreneurs feel safe and accepted here.'

The prosperity of Hangzhou is a result of the economic success of Zhejiang province, of which it is the capital, a success driven by private entrepreneurs.

It has China's largest number of millionaires, whose rags-to-riches stories are textbooks for aspiring entrepreneurs.

These wealthy individuals naturally look to Hangzhou as a place to invest their money and buy a home in an environment more pleasant than the place they work. Hangzhou is their Monte Carlo, easy to access by car from the booming cities of Wenzhou, Ningbo and Yiwu, where they make their fortune.

Seeing the purchasing power of this class, global luxury goods makers have moved in.

The Giorgino Armani shop has been open less than a month and sales lady Xu Mei cannot contain her excitement.

'Come to the VIP area,' she said, guiding her visitors to the lift, up to the third floor and opening the door to a room with a commanding view of the West Lake. 'When Mr Armani saw this, he decided to open a store here.'

It is Armani's third store in the mainland, after ones in Beijing and Shanghai. The first two he owns himself and this one is a joint venture with the developer of 'Euro Street', a row of luxury European brands that is under construction.

The completion of the street will bring a more fashionable look to the city. A low-rise row of buildings on the north side of the lake, next to a new Hyatt hotel, it boasts Dolce & Gabbana, Blenz Coffee and Armani, with Zegna, Paladini, Corneliani and Steffano Ricci stores to open soon.

French cuisine is available at two restaurants, named Rosso and La Tour, owned by a Taiwanese named Tsai Tsong. On the walls are photos of him with Margaret Thatcher, Colin Powell, Jimmy Carter and the Bush family, from when he worked in America.

Hangzhou is marketing itself with the slogan 'The international leisure city', spending hundreds of millions of yuan on green space and landscaping, especially around the West Lake, which is turning into a luxury district.

Close to the lake, the Shui On group of Hong Kong is building a dining and commercial complex, Xihu Tiandi, similar to its successful Xintiandi development in central Shanghai.

Hangzhou has been a city of the rich for centuries. It was capital of the Wu and Yue kingdoms in the 10th century and imperial capital of the Southern Sung Dynasty in the 12th and 13th.

It has been untouched by war since 1860, when soldiers of the Taiping rebellion laid siege to the city. The residents were so accustomed to abundance that they had stocks of silk and leather but no grain and thousands starved to death. After that, the overthrow of the Qing, the Japanese invasion and the civil war all passed it by.

Pre-war accounts describe the lifestyle of the rich as meeting the city's thousands of monks and ladies of pleasures. The communists closed most of the temples but the ladies are alive and well, many of them customers at the luxury stores, as they wile away the time waiting for their lovers to return from work.

In the evening, as you admire the lines of the mountains that circle the lake against the star-specked sky, it is hard to think of increasing steel production and overtaking Japan as a manufacturer of machine tools.

Conspicuous consumption, not production - that is the new economy.