The red lanterns and the tradition and ceremony revolving around them used in Zhang Yimou's Raise the Red Lantern have no basis in Chinese history. According to John Hamm and Yomi Braester (assistant professor and adjunct professor at the University of Washington's department of Asian Languages and Literature, repectively) the only historical use of red lanterns in such a fashion was by imperial subjects who had received a personal commendation from the Emperor.
Zhang Yimou has often been accused of misrepresenting and distorting Chinese culture and history in his films, the invention of the red lantern tradition being but one example. However, I am of the opinion that he is a director concerned with accurately portraying human tragedy and not Chinese history. Were he more concerned with historical accuracy, his movies would be absent of some of their most powerful scenes.
However one may feel about the invention of a tradition for a film, the red lanterns are an extremely effective narrative tool.