According to the Chinese government, who haven't yet gone public with the announcement, but have warned PC makers about the deadline, this measure's aim is to protect the Chinese from harmful content, primarily pornography. But since this same government has blocked sites like Twitter, YouTube, MySpace and Bing, it's quite possible that this software's primary aim is adding another layer of censorship over the existing Great Firewall.
The Chinese authorities have, however, taken a somewhat lax approach - for now. According to the WSJ, the software, whose Chinese name is "Green Dam-Youth Escort" needn't be pre-installed on the PCs; it may simply come in the form of a CD, and the users can choose whether they want to install it or not. The software is designed in such a way that it allows transferring of user's private information, as well as blocking sites other than pornography; according to software's developer, Jinhui Computer System Engineering Co, it would have no reason to do so. It doesn't sound very convincing, and given a choice, I'd definitely skip it; it's unclear, however, whether the authorities plan to somehow pressure users into installing the software.