All is not lost, however. If you've lodged a dispute with Paypal and it is not yet resolved (or you've yet to lodge a dispute), you need to ring them and tell them that under Australian law, it is illegal for you to send counterfeit items via Australia Post and you are therefore unable to return the fake drive to China as requested in order to receive a refund.

You may need to ask to speak with a supervisor, and they will probably require letterheaded documentary evidence from your local computer shop to prove that the drive is indeed counterfeit, but you won't be required to send the item back to China and will be asked to destroy and dispose of it, and you will still receive a full refund.

I don't know how much it cost and you may not consider it a worthwhile or economically viable exercise, but nevertheless I'd still be inclined to do it purely on principle, and to teach the seller that in Australia, at least, he will be forced to refund regardless, without getting his drive back to sell to some other poor unsuspecting buyer.