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This is not to say that I don't think the Peace Prize should have been given, I just think that a) this might not have been the time to do it and b) that there might have been a more tactful way to do it than announcing it to the world, though that said I cannot comment on their execution, since I have no clue what was done behind closed doors.
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I can't think of a better way or opportunity for the world to take a stance on humanitarian issues, really. The nobel prize has a long tradition, the committee which decides the winner is supposed to be independent of nations (although China has a hard time accepting this) and the prize was awarded a chinese person rather than directly pointing the dfinger at the chinese government. Announcing it to the world makes all players in the game very visible. Let's say China went to war over this, how would they define a reason? They go to war because a chinese person won the peace prize? Considering the committee is supposed to be independent, what country should they attack?
Of course there's going to be some conflict, it's hard to criticize a nation without that happening - and when you take that into consideration, the peace prize seems like a good way to me.
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Also, this way of doing it really empowers the peace activists within China in a way that I think would be hard to achieve otherwise. The world shows them support.