I am sure his intentions are good and he sounds so cute and bright but other kids and parents won't appreciate him if he makes them cry. I hope this doesn't sound to harsh but next time he does this I would say in a very sweet voice "oh you want to hug like that and keep hugging him. When he squirms to get away ask him if you should let him go or if you should keep hugging him like that...Point out that he doesn't like it. He'll learn very quickly those kinds of hugs aren't actually that nice. (not that I think he is purposely being too rough) I think if you say 'oh that's a nice hug but stop" it is actually a confusing message. If it was really nice he wouldn't have to stop.
Although our family is affectionate with our children, I have taught my kids to keep their hands to themselves where other children are concerned. This has prevented many fights that start to brew especially when the kids are in their car seats.
I think as long as you keep being as loving to him (and of course you will) you don't have to worry about crushing his spirit. It will break your heart more if other kids don't want him around.