The Legend of Why Red Envelopes Are Given
During the Chinese New Year period, the married or the elderly give red envelopes to children or unmarried juniors. A red envelope is also called yasui qian (“suppressing Sui money”).
According to legend, on New Year’s Eve, besides the monster Nian, there was a demon named Sui that came out to terrify children while they were asleep.
It was said that the children who were touched by the demon would be too scared to cry out loud, and got a terrible fever and even became mentally unstable. To keep children safe from being harmed by Sui, parents would light candles and stay up for the whole night.
On one New Year’s Eve, in an official’s family household, the parents gave their child eight coins to play with in order to keep him awake, so as to avoid him being hurt by the demon. The child wrapped the coins in red paper, opened the packet, rewrapped it, and reopened it until he was too tired to fall asleep. Then the parents placed the packet with eight coins under his pillow.
When Sui tried to touch his head, the eight coins emitted a strong light and scared the demon away. The eight coins turned out to be eight fairies. From then on, giving red envelopes became a way to keep children safe and bring good luck.
Credit to: http://www.chinahighlights.com/travelguide/festivals/chinese-new-year-legends.htm