The origin of the Chinese lantern there don’t have a definite answer. Lantern is a kind of ancient lamps. Written records show that the use of lanterns dates back to the 8th century, Chinese Tang Dynasty. After that time the lanterns are wildly used in Chinese Qin and Han Dynasty. The paper Lantern may start from Eastern Han Dynasty when paper is invented. The custom of watching Lantern in the Lantern Festival is start from the Early Han Dynasty.
There also have a legend about Emperor Ming of Tang prepared many lanterns to celebrate the Lantern Festival in the palace. It is believed that the light of lanterns can make the country peace and prosperity. Because the light of lanterns is a auspicious symbol of Chinese dragon, indicates that people’s happiness and country’s prosperous. More Lantern Festival legend.
Now hanging lantern in the Chinese Lantern Festival is still widely popular in China.