But he kindly forwarded your question to his friend Chuimei Ho, an academic who lives in the Seattle area.

“The phrase ‘celestial empire,’ meaning more or less ‘empire ruled in accord with Heaven,’ goes back a long way in China,” Chuimei wrote via e-mail.

But it wasn’t until the early 19th century that English and French translations began to appear in foreign publications and Chinese diplomatic correspondence, he noted.

“The plural ‘celestials,’ referring to citizens of the celestial empire, seems to be American in origin,” he continued. “It may have been introduced innocently by newspaper writers or editors who in those days felt that good writing meant a feverish search for synonyms.”

We would note here that the feverish search continues, but we digress.

Let’s go back to Chuimei’s explanation.

“But the usage quickly became pejorative when readers interpreted it as meaning that Chinese, absurdly in view of their obviously inferior economic and legal status, considered themselves to be superior to ordinary humans,” he continued. “Calling a mere laundryman ‘celestial’ was an irony that even the least educated anti-Chinese white hoodlum could understand. So it rapidly became an insult for some, while others, especially journalists, continued to use it with less prejudicial intent as a synonym for ‘Chinese’ or ‘Chinaman.’ ”

(http://www.autoadmit.com/thread.php?thread_id=3807355&forum_id=2#34759800)