I would indeed tend to think of the colourful tassel/cloth attached to chinese swords as a means of diversion. When I watch my instructor's daughter doing her straight sword forms (she's the school's best student and a multiple national champion), it strikes me that the tassel catches the eye much more than the blade does, and since she spins her weapon very fast it's almost impossible to keep visual track of the blade: the eye always gets back to the damn tassel, which is precisely the opposite way. So I guess it's its original purpose... Just my opinion though.