Oh, the gnashing of teeth and tearing of hair! The announcement last month by the State Council that Shanghai will become a major international financial centre by 2020 has prompted the usual bout of agonised soul-searching among Hong Kong-based commentators. 'How can Hong Kong hold its own against such a mighty competitor backed by the all-powerful central government?' they wail, usually before going on to suggest that the city should throw itself on the mainland's mercy and either plead for special favours of its own from a benevolent Beijing or accept its fate and agree to complete amalgamation with Guangzhou as soon as possible. You'd think they should know better by now. If international financial centres could be created by government decree alone, then Singapore would have eaten Hong Kong's lunch in the mid-1990s, and any remaining crumbs would have been gobbled up by Shanghai in the early years of the present decade. But great financial centres are not conjured into existence by government diktat. Down the ages they have all - Venice, Amsterdam, London, New York and Hong Kong itself - grown up servicing centres of vibrant private enterprise. So instead of worrying that Shanghai is about to usurp Hong Kong's position, observers here might like to take a closer look at Shanghai's economic structure. The picture is revealing and, for Hong Kong, reassuring. Far from launching its bid for financial supremacy from a position of strength, Shanghai is finding the weaknesses of its model cruelly exposed by the current economic slump. Although there is no commoner symbol of China's thrusting new entrepreneurial economy than the Pudong skyline in Shanghai, the image is misleading. Shanghai is far from being a hotbed of enterprise. Ever since Jiang Zemin and Zhu Rongji took over the city's government in the late 1980s, Shanghai's economic policy has been aimed overwhelmingly at promoting state sector and foreign investment. For years, the government funded massive investment programmes by requisitioning and auctioning land, paying minimal compensation, and ploughing the proceeds into state-owned industries. Meanwhile, every effort was made to attract investments from foreign manufacturers of high technology by offering generous tax breaks and other incentives. In some ways, the policy was a roaring success. Between 2000 and 2004, the city's heavy industry grew at a 25 per cent annual rate, and today Shanghai is China's leading producer of cars, power generating equipment, personal computers and many important chemicals. But the city paid a heavy price. Discriminated against by tax and other regulations, denied access to land and tied up in red tape, local private entrepreneurs got squeezed out. According to Massachusetts Institute of Technology professor Huang Yasheng, the local private sector's share of Shanghai's fixed asset investments fell from a high of 10 per cent in the mid-1980s to a negligible amount this decade (see the first chart below). As a result, private income growth was suppressed. Although today Shanghai's per capita gross domestic product is around five times the national average, disposable household income is only about 1.8 times the mean (see the second chart). The concentration of so much wealth in the hands of the state and foreign-invested businesses has acted as a further disincentive to private enterprise. Today, according to Mr Huang, Shanghai not only has relatively fewer private companies than almost any other province in China, but they are smaller too. The policy may have generated impressive headline growth during the fat years, but as Mr Huang warned last year: 'The Shanghai model will come back to haunt Shanghai if there is an external shock.' Today, with China suffering massive overcapacity in many heavy industries, with exports through Shanghai's port down 10 per cent year on year and local government revenues also down by about 10 per cent, that shock is now here and Shanghai's economy is looking vulnerable. The city's response has been to ask Beijing for special favours to promote its financial sector. But with no private sector to speak of and a woefully inadequate regulatory regime, Shanghai is challenging from a position of weakness, not strength. Despite all the breast-beating, Hong Kong has little to fear.