Headlines from China reveal that even its booming economy is not immune to declines in housing. The news site Xinhuanet.com reported on April 8 that property prices in multiple Chinese cities fell 3 to 5 percent. While your initial reaction may lack sympathy for the Chinese, (since their government is intentionally trying to lower house values) you might want to pinch yourself and reevaluate the situation.

After all, the Chinese are one of the leading buyers of U.S. treasury bonds — the only source of cash allowing the printing presses at the U.S. Treasury to keep funding this recovery. If our bonds stop selling, this strategy to fix our economy will be over. The age of austerity will slam the U.S. into another recession or worse. Don’t get me wrong; I am fully supportive of Keynesian-style fiscal intervention to stop the demise of America. However, I am not in favor of giving the banks all of this money so they can hoard our country’s future away. Unfortunately, if recovery doesn’t happen soon, it may be that Armageddon was merely delayed rather than avoided. The good news is that early signs of recovery are evident in some markets, but far from guaranteed.

The Fragile Almighty

The U.S. economic recovery won’t happen if Chinese housing prices keep falling. Why? Because China won’t be able to continue helping the U.S. finance its recovery if China must begin financing its own.

The Chinese system of lending makes the country particularly susceptible to a housing crash. The July 2006 McKinsey Quarterly characterizes the Chinese banking system as “misguided lending.” It points out, “unlike institutions elsewhere, China’s banks lend primarily to companies rather than consumers.”

So where do the common people of China get access to cash? They borrow it from family, friends, and neighbors. This is an “old world” system of lending based on trust and personal guarantees, supported by home values. We are talking about a billion people operating without credit cards and lines of credit — a savings based economy with little conventional funding for the average person.

Further highlighting China’s problems, the Congressional Research Service reported in December 2009 that “despite the relatively positive outlook for its economy, China faces a number of difficult challenges that, if not addressed, could undermine its future economic growth and stability. These include pervasive government corruption, an inefficient banking system, over-dependence on exports and fixed investment for growth, the lack of rule of law, severe pollution, and widening income disparities.”

Meanwhile, according to a November 2009 report by Merrick Cary of the Lexington Institute, “the whole world seems convinced China is going to be the engine of global recovery, and the new global economic superpower. But if you peek behind the curtain you begin to have some doubts.”

If the Chinese home values begin to tank, so will the confidence of its prime lenders (family, friends, and neighbors). Lending will halt and with it the local economy. It is an economic tinderbox waiting to blow, and the latest news about home values has me quite nervous it has already begun. According to Cary’s report, the Chinese commercial real estate market is already at 40 percent vacancy rates with a host of other signs of economic stress. Does this scenario of “this time its different” sound eerily familiar? We, too, relied on housing wealth to fund America’s economic growth, until … well, you know what happened.

Saving Grace

The good news is the fact that some U.S markets are starting to see sales volume increases. We desperately need this to continue for the U.S. recovery to happen. Many economists believe we cannot recover unless housing recovers. Fortunately, the Phoenix Business Journal reports that March 2011 home sales increased to its highest level in 66 months. This is great news that could signify the beginning of a buying trend in housing. While trying to remain hopeful, I was abruptly let down to read in the same article that home prices also keep declining, causing more home owners to abandon their homes. Clearly we are not out of the woods yet.

Beyond Optimism

Perhaps it is time for our elected officials to try something different — something impactful before its too late and our best friend with lots of money stops financing our squandering ways.

I believe we should demand that our elected official institute direct intervention to consumers — in the form of tax credits and direct reimbursements to consumers with financial hardship — to prevent further foreclosures. Stop funding the banks; they clearly can’t get it done even after receiving ludicrous sums of money. How about a fraction of that amount spent directly to consumers who, in turn, would spend it directly into the economy?

Brazil did this, and it now resides as the eighth largest economy in the world, reducing its poverty with jobs and economic growth. It is now among the fastest-growing economies on the planet after being plagued with decades of high inflation and nearly third-world status. It avoided the waste associated with government programs and went directly to the consumers. The program is called Bolsa Familia, instituted in 2003 to avoid government waste by directly funding those in need.

According to a Nov. 10, 2010, report on the Guardian News Poverty Matters Blog, published in partnership with the Bill and Melinda Gates Foundation, “Since 2003, 12 million families have joined the [Bolsa Familia] scheme and receive small amounts of money (around $12 a month). Inequality has been cut by 17 percent in just five years, which is perhaps one of the most dramatic achievements in welfare ever recorded. The poverty rate has fallen from 42.7 percent to 28.8 percent.”

In the U.S., we instituted the tax credit for first-time buyers throughout the housing decline. This limited program was criticized for pulling forward sales, but I believe it actually created urgency in the market and stimulated recovery. Since its expiration, we have seen further declines in home values and skyrocketing foreclosures. It is terribly unfortunate that only a relative pittance was spent on this program and instead more money went to fill the bank vaults, where it all sits wasting away our future.

The reality of the situation is clear. Time is running very short for a U.S. recovery. If we don’t get up on our feet soon, we may not have the luxury of QE3 funded by our Chinese friends to save the day. This is a disaster that can be averted if we learn to avoid the ones who created this mess in the first place.

Paul Cardis is founder and CEO AVID Ratings, the leading provider of customer loyalty research and consulting to the home-building industry. Through the AVID system, home builders improve referrals, reduce warranty costs, and strengthen their brands. He can be reached at paul.cardis@avidratings.com.