I think the subtle difference is that in actual usage in English, when we have the same word for the language as the group of people, we add the word people. For example: "many Italians live near me" is correct. But we would not say "many Italian live near me". Instead we'd say "many Italian people live near me". With Chinese, that's the name of the language, so to make things clear, we typically say "Chinese people". Or Japanese people. You mighy say "the English" to refer to the entire population of people in England. But you would not say "look at those English over there". You'd say "look at those English people over there". I can't point to a specific rule for this. It's more just common usage.
I agree that this is the usage I'd use, I only have friends from hong kong not china so I don't know how they usually self refer, but I have many japanese friends and they prefer when we call them "japanese" to "japanese people" even though almost no one says that. Like, only people who know a lot of japanese tend to say japanese.
I dunno if the same situation exists with chinese people but that might be a thing.
How come this thread has been going for years and they've never updated the sentence? No native speaker of American English born after 1965 would say "Many Chinese live near me." It sounds like a Russian is translating "Mnogo kitaitsev" directly, or a racist uncle is telling you how the neighborhood ain't what it used to be. Those are the only kinds of cases where I can imagine hearing this. Duolingo, you should edit this.
"Many Chinese people are living right next to me," should be accepted as a translation. The idiom of "right next to me," indicating the immediate area, also exists in spoken English. Около and "near," it would seem, both convey this less emphatically, or at least less colorfully.
"many Chinese are living near me" sounds strange to me. Present continuous is not generally used for long-lasting states such as this, but rather for ongoing actions that are limited in duration. E.g. I'm walking (right now), I'm wearing shoes (today), but I work as an accountant (more or less indefinitely) and I live in Moscow (for now).