The reason behind the whole process is very simple -- money. Chinese DVD player manufacturers are refusing to pay licensing fees for their players to companies who own patents on DVD technology (which include Japanese Sony, Japanese Pioneer, European Philips, Dolby Labs, Thomson Multimedia, etc). Licensing fees are currently appx. 20 to 25 percent for $100 DVD player. Same thing happened in early 1990s, when companies who developed VideoCD format (Sony, Pioneer and Philips) which became an instant success in Far East, tried to get Chinese player manufacturers to pay for the patents -- Chinese government simply organized a joint venture which eventually developed royalty-free SuperVideoCD format.
It is still unclear what differences the new format(s) will have. Some are saying that the video will be stored in HD format with some other than MPEG-2 compression format.
Interesting -- I'm fairly certain that these discs wont have CSS or Macrovision copy-protection :-)
Full article from EETimes