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I absolutely agree with your premise.

But I cannot help but feel saddened, to reduce the prize to a level of the publicity it conveys.

Neither can I eradicate the thought that awarding such a prize in this manner surely is felt as a provocation by the Chinese government as you rightly point out that the sole effect is of publicising and canonising a man whom they are, by their values, imprisoning justly for admitted subversion.

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It's definitely more than just publicity. There's a difference. Being on the cover of a Time magazine is publicity. But a Nobel Prize (or similar recognition) is not just publicity. It's elevating a person to the same stature as Nelson Mandela, MLK etc. It's hope to the people following them, it's inspiration, it's recognition. It's a signal to the establishment that it's no longer just a dissident but perhaps birth of a movement, if history has taught us anything. It's definitely more. If not anything, there is a big chunk of prize money, it generally is put to use for a good cause too. :)

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