Back in January, Premier Wen Jiabao reportedly confided in a group of senior advisers that the consensus of mainland leadership was that this year would be 'the most critical' for China. As things are evolving, Mr Wen was not exaggerating in the least. As President Hu Jintao and Premier Wen bowed to the applause of NPC deputies and officially began their second and final five-year terms this weekend, they found themselves facing the sternest tests of their leadership skills, political wisdom and economic acumen since coming to power a little more than five years ago. Bloody riots in Tibet and ensuing intense international media coverage, just a few months before the Olympic Games, have presented an extremely awkward situation for mainland leaders who aim to use the occasion to mark China's debut as a global player. Economically, mainland leaders are caught in an acute dilemma in which, on the one hand, they are trying to combat inflation and prevent the economy from overheating, and, on the other, they are nervously watching the unfolding global economic uncertainties induced by the United States' subprime crisis. Coinciding with the Olympic event, there is another equally politically sensitive occasion in which mainland leaders are making elaborate preparations to mark the 30th anniversary of the mainland's opening up and economic reforms. This is not merely a commemorative event. Analysts at home and abroad will be watching for clues as to their perseverance and broad thoughts in pushing ahead with the more difficult changes, including political reforms. This is not the first time Mr Hu and Mr Wen have been confronted with such stark challenges. Roughly the same time five years ago, when they had just begun their first term, the Sars crisis occurred and put them to their first major test under the scrutiny of the international community. They passed that test with courage and confidence. The latest challenges may prove more difficult. International pressure is mounting for Beijing to show restraint and defuse the tension originating in Tibet through dialogue. But leaders are most likely to use necessary force to smother the riots which have reportedly spread to some parts of Sichuan and Gansu where Tibetans also live. The official media has already blamed supporters of the Dalai Lama for inciting the riots and seeking independence for Tibet. This signals they are not viewing the unrest as a human rights issue but a sovereign issue. On issues of sovereignty, no Chinese leader can afford to be seen as weak or accommodating. But in the context of the Olympic Games and in the full glare of the international community, leaders will be hard pressed to end tensions quickly without being seen as too harsh in their response and triggering international condemnation. While the Olympic Games may be the perfect occasion to showcase the nation's economic rise, the mainland economy appears to need serious fixing. Inflation soared to a high of 8.7 per cent last month with officials admitting huge difficulties in containing it within the annual target of 4.8 per cent. The central government's efforts to cool the economy have been complicated by the economic uncertainties in the US and Europe, top destinations for exports. Exports have been one of the mainland's key drivers of economic growth. If the US economic situation worsens and mainland exports slump, Beijing could be forced to relax its macroeconomic controls in mid-year. Many economists and government officials have played down concerns over inflation, arguing it is mainly caused by food prices that are expected to stabilise in the second half of the year. However, there are signs that show inflation is spreading to other sectors. More importantly, if history is any guide, concerns over inflation can heighten expectations of more price rises, which may potentially lead to panic and instability. While Premier Wen may declare war on inflation in his government work report, he does not have any magic solution to bring down the prices quickly as the costs of oil and other international commodities are soaring. Official media reported yesterday that southern provinces, including Guangdong and Hainan , have been experiencing an acute shortage of petrol and diesel. As the car-craze culture takes hold, this is something which could set people's blood boiling.