Sorry to hear of the trouble your going through at the moment. But I agree greatly with your closing line since this experience will leave a deep scar (in your pocket that is).
But seriously, always keep in mind, you can NEVER expect to buy authentic brand name products from China. So if someone offers you a great deal on something at is supposedly branded just turn around and walk away. Remember that 9 out of 10 times these items will be fakes, knock-offs, counterfeits call it whatever you want but they will most definitely not be anything near authentic.
I guess, you'll have to issue the refund to your customers ASAP. Regarding your refund from your supplier, what has your supplier agreed to when you contacted him about this? As with most suppliers, you will have to return the item first before you can get your refund. But I'm not sure about the arrangement you have with yours.
DH Gate has strongly discouraged their customers from doing business with any of their suppliers off the site, this is for your own protection. I'm not too sure if you can file a dispute on PayPal for money you sent as a gift. You can try though.
All the best! :)