According to tales and legends, the beginning of Chinese New Year started with the fight against a mythical beast called the Nian (Chinese: 年; pinyin: nián). Nian would come on the first day of New Year to eat livestock, crops, and even villagers, especially children. To protect themselves, the villagers would put food in front of their doors at the beginning of every year. It was believed that after the Nian ate the food they prepared, it wouldn’t attack any more people. One time, people saw that the Nian was scared away by a little child wearing red. The villagers then understood that the Nian was afraid of the colour red. Hence, every time when the New Year was about to come, the villagers would hang red lanterns and red spring scrolls on windows and doors. People also used firecrackers to frighten away the Nian. From then on, Nian never came to the village again. The Nian was eventually captured by Hongjun Laozu, an ancient Taoist monk. The Nian became Hongjun Laozu's mount.
Source of Information: http://en.wikipedia.org/wiki/Chinese_New_Year