"In recent years the word ‘‘laowai’‘ has begun to stir up controversy within the expatriate community in China. In this way ‘‘laowai’‘ is similar to how Americans view the Spanish word gringo and Westerners view the Japanese word gaijin or the Thai word farang. This is because many foreigners in China believe that ‘‘laowai’‘ is a derogatory term. This is because some Chinese frequently shout out "Laowai"! to foreigners passing by, which may then be followed up with laughter and taunting.
The official Chinese press has expressed concern about the inappropriate use of ‘‘laowai’‘ and foreign sensitivities surrounding the word. Editorials, written by foreigners and Chinese, have appeared in English and Chinese language newspapers about the subject, but generally indicate that ‘‘laowai’‘ is not intended to be a pejorative term[3]. However, local governments have launched campaigns aimed at educating the Chinese public about the appropriate usage of ‘‘laowai’‘.
The term "laowai" and also the rough English equivalent are sometimes considered offensive when used by migrant Chinese communities in Western countries. The rationale for people taking offense at this is associated with their belief that they are not foreigners in the country in which they are born. Furthermore, in many Western countries the term "foreigner" is not used of migrants to anywhere near the extent that it is used of Westerners in China."

http://en.wikipedia.org/wiki/Laowai