It's no special effect, nor is it a new cloaking device inspired by Predator and the Red Dawn remake. It's old-fashioned hard work and dedication: Liu Bolin stays very still for hours while his assistants paint him to match the background.
Given Chinese safety standards, I hope they use a better class of paint than has shown up on some children's toys from there. Because I want this guy to keep doing stuff like this for a long time without being poisoned through his skin.
via Twisted Sifter