The short seller did nothing wrong. Shorting simply means he borrowed the stock in order to sell it-- sell high, wait for the price to drop, then buy low in order to return the shares to the lender. The buyer on the other side of the short sale should have done more due diligence. No one forced them (be it a person or an institution) to take up that position.

The Chinese company (or some affiliate) was the one who had pumped the stock up. The short seller was just a regular market participant who was rewarded for his hard work and diligence.