The author, also known as Lao Wei, added that the Chinese state was a "massive scrap heap that must break apart" and accused the West of "colluding with the executioners under the cover of free trade."
Liao was speaking as he collected the German Book Trade Peace Prize, the country's second highest award after the Georg Büchner Prize, and its endowment of €25,000 at a ceremony attended by German President Joachim Gauck.
Liao spent four years in jail after writing the poem "Massacre" about the 1989 Tiananmen Square crackdown.
He moved to Germany after successfully defying a travel ban by walking to Vietnam.
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.
Gottfried Honnefelder, president of the German Booksellers' and Publishers' Association, praised the author as someone who had "restored a voice to the people of his country suffering from repression and oppression."
The award ceremony took place at the Frankfurt Book Fair.
Past winners of the prize 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.
China criticised the nomination when it was announced in June, saying the author had "continued to fabricate stories to receive sympathy and support."
Story continues below…
On Saturday, in an interview made public by Der Spiegel magazine, Liao attacked the Chinese author Mo Yan, who won this year's 2012 Nobel Literature Prize as a "state poet" close to the communist regime.