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He spent four years in jail after writing the poem "Massacre" about the 1989 Tiananmen Square crackdown.
Liao is also the author of "The Corpse Walker," which records the lives of working-class Chinese including a grave robber and a delusional peasant who believes he is an emperor. His works are banned in China.
In its reasoning, the Book Trade foundation praised an author who has "bravely and unflinchingly protested against political oppression and given an audible voice to the disenfranchised people in his country."
"The author, who has himself experienced prison, torture and repression, is a determined chronicler and observer of the outcasts of modern China," added the foundation in a statement.
The honour, Germany's second highest book prize after the Georg Buechner Prize, carries an endowment of 25,000 euros ($32,000).
The German Book Trade Peace Prize has been awarded each year since 1950.
Past winners include Turkish author Orhan Pamuk, Hungarian Peter Esterhazy and Czech writer and former president Vaclav Havel.
Last year's prize was won by internationally acclaimed Algerian author Boualem Sansal.
Liao will be formally presented with the prize at the Frankfurt Book Fair, the world's biggest, on October 14.
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Liao is also the author of "The Corpse Walker," which records the lives of working-class Chinese including a grave robber and a delusional peasant who believes he is an emperor. His works are banned in China.
In its reasoning, the Book Trade foundation praised an author who has "bravely and unflinchingly protested against political oppression and given an audible voice to the disenfranchised people in his country."
"The author, who has himself experienced prison, torture and repression, is a determined chronicler and observer of the outcasts of modern China," added the foundation in a statement.
The honour, Germany's second highest book prize after the Georg Buechner Prize, carries an endowment of 25,000 euros ($32,000).
The German Book Trade Peace Prize has been awarded each year since 1950.
Past winners include Turkish author Orhan Pamuk, Hungarian Peter Esterhazy and Czech writer and former president Vaclav Havel.
Last year's prize was won by internationally acclaimed Algerian author Boualem Sansal.
Liao will be formally presented with the prize at the Frankfurt Book Fair, the world's biggest, on October 14.
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