If you're from a third world country that was a former colonized territory, then you'd understand the importance of sovereignty to third world countries. This may be a surprise to many of you, but China's not the only country that cares about sovereignty and pride. The ROK also has island disputes with Japan that have gotten quite ugly, and Pakistan and India are still throwing rocks at each other over Kashmir. The list can go on.
This wasn't actually that big an issue but the Japanese government decided to spark things up by purchasing the islands because it's time for an election in Japan, and nothing shows you're tough like starting things up. The problem is that if China recognizes the islands as Chinese territory, then the Japanese government has no legitimate right to purchase said land. This is why China and India have a border dispute; if China doesn't recognize that Tibet has the right to distribute its land with India, then any agreement is null.
It's unlikely the Chinese government inspired the riots because it forces China to play a hand when it doesn't want to. Now's a sensitive time for the Chinese leadership, and going to war right now really isn't in China's favor. This forces China to act, which is why they sent the ships, but haven't landed any troops. They don't want it to escalate. But they also can't stop the riots because it makes you look like a complete sellout. The Chinese people already hate the Japanese, but you're going to protect Japanese businesses from your own people? Will you expect Muslim policemen to beat other Muslims to protect an American who insults your religion? Considering how half-hearted Muslim police officers protected American embassies, apparently not.
This is a bit different than before because the possibility of escalation is pretty high. China won't back down, and its people will not back down either. They're pissed at Japan, but also pissed at the Chinese government for being pansies. That's why they're carrying Mao's portrait around and not Hu's.