Although the programme will initially be launched on a voluntary basis once it rolls out on July 1, it is said by 2019 it will be mandatory for new cars.
It has been put in place by China's Ministry of Public Security, along with the ministry's Traffic Management Research Institute.
According to documents seen by the Wall Street Journal newspaper, the RFID chips - placed on the windshield - could combine with devices on the side of roads to allow government officials to study and improve congestion and thus reduce pollution.
Another goal outlined is the hope it could halt the rise of vehicular terror attacks.
There are concerns the technology could be further used for surveillance, and James Andrew Lewis - a senior vice president at the Centre for Strategic and International Studios - has suggested it could be another tool used by the government.
He told The Verge: "The Chinese government has gone all out to create a real surveillance state. [There's] social credit, and facial recognition, and internet and telecom monitoring.
"It's part of this larger effort to create total information awareness in China for the government... [The system is] just another step for this kind of overarching control. [Any] positive benefits are outweighed by the intrusiveness of the whole thing."
That said, the system wouldn't work like GPS as it wouldn't be able to locate a car at a specific location or moment - and it's not known how much information will be stored on the chip, besides the license plate number and colour of the vehicle.