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I have read quite a few articles about the word "Laowai". Most of them were about the confusion, unease or even anger towards hearing this word over and over again in China. Although I am a Chinese, I can understand how it probably would feel like to be in a crowd, taking all the stares, hearing people saying "laowai" which you just don't hear in a face to face converstation. If I were in your shoes, I probably would also feel uncomfortable, and certainly would also want to find out what this word REALLY means.
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So in this article, I am going to offer my opinions on the word "laowai", as a Chinese who himself has been a foreigner to several other countries incluing USA and european countries, and trying his best to be objective. I am assuming that most readers of this article are laowais. So the "you" in this article are meant for those who would be called laowai. If some readers are not laowai, I am sorry but using "you" sometimes really is convenient :)
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The target population of the word "Laowai"

Who would be called "Laowai"in China? There are several different answers to this question. Lots of people would say that Laowai pretty much equals foreigner. Some may say that only white people would be called Laowai. On Wikipedia, there is another version that says laowai is used on Caucasians.
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So which is correct? I would say none. Ask some one who is black if he gets called laowai a lot, the answer would definitely be yes. So it is certainly not just white or Caucasian. But if you ask a Japanese or a Korean if he hears laowai a lot? Probably Never.. So it is also not just foreigners. What is it then? My answer is: People who look quite different from Chinese. Yes, it is quite close to "Foreigner" since there are not many countries where people look like Chinese, but still they are not exactly the same.
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How so? Well, this is just how people here use this word. I guess you are probably not satisfied. :-) Yes, it was an honest answer that I know for sure, but it really did not quite answer the question. OK, I cannot speak for every Chinese but I have a guess that I think does make sense.
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Let's start with why laowai was usually not used on Japanese or Korean. What are they usually called? In most cases just Japanese or Korean. Yes, we do have ways to tell if someone nearby is Chinese or not, Japanese or Korean, usually by language, but not just that. Then they will just be referred to as Japanese or Korean. How about people from other countries? As for me, if I hear some laowai speaking English, I can probably tell if he is from a country where English is the native language or not, American or British. But beyond that, I have little idea. For most Chinese however, they probably would have no idea at all. So a laowai would just appear to them as a foreigner. And "Laowai" is so much easier to say than "Waiguoren"(外国人, means foreigner). I guess this was how "laowai" gradually became so popular since maybe 30 years ago. And now so many Chinese are quite used to saying it.
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Is "Laowai" neutral or what?

So we should go back to the original topic. Is this word neutral or something? You probably already know that the word consists of two characters: Lao (老, old) and Wai (外, Foreign). And of course it does not mean "Old Foreigner". Before going furthur, let me show you an article from People's Daily, and it is pretty much an official clarification of "Laowai" from China government.

http://english.peopledaily.com.cn/90001/90780/91345/6325229.html

In this article, The "Lao" was compared to that of "Lao Wang", "Lao Zhang", and it was stated that "Lao" is a term of respect and intimay. OK, Chinese do use "Lao" as a prefix to names a lot to call some one who is a little bit old, at least middle-aged. But is it because of respect? No, I don't think so. With true respect, "lao" should be placed after the family name. "Wang Lao" and "Zhang Lao" actually show respect. And the structure of "Lao + Family name" is usually used in order not to be impolite. Oh yes, calling out someone's full name sometimes is not polite, in Chinese manners.
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But then again, "Lao Wang" and "Lao Zhang" are usually indeed old, right? Young foreigners in China are still called "Lao Wai". That's more than trying not to be impolite! I would say that sometimes "Lao" does get used to close up the gaps between people in Chinese. (It centainly is not as far as intimacy though, oh man...) The best example is "Lao Di"(老弟, old younger brother), which is used to call someone who is younger in a quite friendly way. If you are still not happy, a lot of Chinese overseas do call themselves "Lao Zhong"(老中, Old Chinese).
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It would seem that I am ready to conclude that laowai indeed is neutral. In fact, I am not finished yet :) I do have another opinion to share, which is: A somewhat inherent reflection of a laowai is that: he/she does not know much about Chinese, nor is much known about him/her, such as the way he/she would think and would behave. In other words, big culture difference. That is partly why "Laowai" is seldom used on Japanese or Korean, since their cultures are similar to Chinese culture in so many ways.
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Whether aware of this inherent reflection of the word or not, in most cases Chinese use "laowai" intending it to be neutral or even a little friendly. But occasionally some could use this word to emphasize the culture difference, especially when the laowai's certain actions or words clearly reveal the culture difference. Such as laowai trying to use chopsticks but in the end dropping the food, or saying poor Chinese, etc. In such occasions, the "laowai" being said could carry a little teasing, but not ill-intended. < br /> All About Shanghai www.allaboutsh.com
So now we can conclude that laowai certainly is a word much more than "Foreigner". But still it is more of a neutral word, could sometimes carry a little teasing, but far from offensive, derogatory or pejorative. If you does not feel it this way or have any other opinions, feel free to make your comments below, or send me an email!