Inflation is apparently a critical issue facing China's new leadership.

A week after Premier Wen Jiabao announced the country's goals to keep inflation at around 4.8 percent this year, the National Bureau of Statistics said inflation climbed to a nearly 12-year high of 8.7 percent in February, driven by a 23.3 percent jump in food prices.

Observers say inflation is more a social issue concerning the subsistence of the people, rather than a mere monetary one. It poses challenges to China's development in several years to come, entangled with an inadequate social security coverage, a yawning income gap and the people's increasing demand for a better life.

"Inflation mirrors the complicated situation and uncertainties facing the government," said Zhang Junbin, a deputy to the 11th National People's Congress (NPC).

Three decades after China started to reform and open up, many deeper contradictions have surfaced, calling for creative thinking from the top leaders, said Zhang, from the northern port city of Tianjin.

The next five years will be crucial for China in achieving its goal to quadruple per capita GDP by 2020 as against the 2000 figure and build a "moderately prosperous society in all respects".

"To that effect the government needs to lead 'sound and rapid' economic growth, improve the people's livelihood and advance democracy in the coming five years," said Yu Pei, an NPC deputy and specialist on world history from the Chinese Academy of Social Sciences.

These challenges and opportunities are also seen as "test stones" for China's own theoretical system, "socialism with Chinese characteristics", which has combined Marxist elaborations on socialism with China's own practice and proven effective in the past three decades.

Jonathan Anderson, an economist with UBS, sees more opportunities than challenges for China.

The only factor that could pose significant risk in China's social and political development, he said, would be sudden economic recession. Yet judging from the present circumstances, China's economy is likely to maintain robust growth in the next five years.

In his analytical report on China published last month, Anderson said the past five years of double-digit growth was a legacy to China's new leadership, including sustained rural income rise, lower unemployment rate, revenue increases, stable FDI inflows and the public's confidence in their government.

How to narrow the income gap, balance GDP growth with environmental protection, maintain social justice and step up administrative reforms are among the major challenges facing the Chinese government in the coming five years, said most NPC deputies attending the annual parliamentary session here.

"The central issue is how to implement the 'Scientific Outlook on Development', and how to maintain stable and balanced development while ensuring all members of society benefit from such development," said Shen Jiacong, an NPC deputy from Tianjin.