... is a Japanese word meaning "short person" or "small child". It's meaning is of someone that is small. It can be translated as "little", but is not used the same way as chiisana [小さな] (tiny, small, little in Japanese).
A prototypical example of the former usage in the original Japanese which brought the term to the attention of Western fans is Chibiusa, a pet name for the diminutive daughter of Sailor Moon formed from Chibi Usagi (or "Little Usagi").
In English-speaking anime and manga fandom, the term chibi has mostly been conflated with the term super deformed or it can be used to describe child versions of characters. Super deformed (or 'SD') is a specific style of Japanese caricature where characters are drawn in an exaggerated way, typically small and chubby, with stubby limbs and over sized heads, to make them resemble small children.
Artists often Super Deform characters in order to show an extreme change in the characters' mood. While the characters' mood may change to anything, seriousness, anger, embarrassment, feigned cuteness, the goal of the animators is always comedic cuteness. Often done at the punchline of a joke for an extra comedic oomph.
The chibi / super deformed style is part of Japanese culture and is seen everywhere from advertising and subway signs to anime and manga. It is often also used on anime and manga in brief interjections to show an extreme or exaggerated emotion, such as anger or surprise, that would be difficult to portray or would seem out of character if expressed on a more realistic face. They are meant to be cute and are often used in humorous diversions from the storyline, such as in Omake scenes between episodes (like the Chibi Tachikoma scenes in the GiTS SAC TV series).
Proportions are often measured using head length as a guide. The average adult is considered to stand seven (1:7) to seven and a half heads tall. Idealized figures are often drawn eight heads (1:8) in length. See this tutorial for more info.
In addition to their modified proportions, super deformed characters typically lack the detail of their normal counterparts. As a result, when a character of average proportions is depicted as a super deformed character, certain aspects of his or her design will be simplified and others will be exaggerated. Details such as folds on a jacket are ignored, and general shapes are favored. If a character has a signature characteristic (odd hair, a particular accessory, etc.) this will typically be prominent on the super deformed version of the character.
In most Anime the SD-Mode only lasts a few seconds, however there are some Anime series where the character designs are completely SD, very often in parodies such as Superior Defender ('SD') Gundam or Scramble Wars. Scramble Wars (1988) was part of AnimEigo's US released Super-Deformed Double Feature (VHS only) which also included Ten Little Gall Force, a mockumentary detailing a behind-the-scenes look at the production of Gall Force: Eternal Story. Characters were drawn as super deformed versions of their Eternal Story counterparts.
Aw man, if that doesn't bring a tear to your eye...!
Hey folks, tell you how long I've been around the Anime scene - I have the Super-Deformed Double Feature VHS in my collection. And no, I won't sell it, so don't ask... -_^ If you have a care, and like me, have very fond memories of Gall Force, BGC, Riding Bean, and Earth Surviver Gaiarth you can watch Scramble Wars on YouTube here.