The earliest reference to a magnetic device as a direction finder is recorded in a Song Dynasty book dated to 1040-44. Here we find a description of an iron “south-pointing fish” floating in a bowl of water, aligning itself to the south. The device is recommended as a means of orientation “in the obscurity of the night.” As Li Shu-hua pointed out in 1954, there was no mention of a use for navigation, nor how the fish was magnetized.[5] However, in Needham’s publication Science and Civilization in China: Volume 4, Part 1 in 1962, he proved otherwise, as Wang Chenduo had pointed out. The Wujing Zongyao (武经总要, “Collection of the Most Important Military Techniques”) of 1044 stated: “When troops encountered gloomy weather or dark nights, and the directions of space could not be distinguished…they made use of the [mechanical] south-pointing carriage, or the south-pointing fish.[6] This was achieved by heating of metal (especially if steel), known today as thermo-remanence, and would have been capable of producing a weak state of magnetization.[6]

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

Interesting illustrations here:

http://www.computersmiths.com/chineseinvention/compass.htm

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The first person recorded to have used the compass as a navigational aid was Zheng He (1371-1435).