Same reason they want to make a copy of your passport when you check in. Many don't want to go through the hassle of having to report the foreigners staying and don't want to risk the fines for not reporting.

The PSB want's to know where foreigners are for security reasons and probably our safety.
The law is that you have to be registered with the local PSB and the lower priced hotels don't have the facilities. e.g the computer link with them (PSB). It isn't really much more money to stop in these motels, but it saves any hassle with the police coming around. Just be aware of the laws and try to obey them and everything will be good. It's the way it is, try not to read something else into it. I stopped at a motel and when they scanned my passport everything was there.

Its also a way of fighting prostitution. Or low end prostitution at least. Foreign men have a bad reputation for taking advantage of the easy to find Chinese prostitutes and the long grade motels they frequent.

I stayed 4 and 5 star hotels and the chickens and pimps chased me. I stayed in a lesser hotel because of convenience in Yangshou, I have bad knees and don't like squat toilets, so never again. The pimps don't find me there or think I have money. How much is it to have a visitor sent to a room?

1 star or 2 star hotel have pros???
alex one day we're gonna have have a beer, i cant believe you believe this whole registering thing is for our safety, more like i want to know where you are and what you are doing at all times. i want to make sure you are not engaging in any political activity. if there are a rash of protest i want to be able to remove foreigners from the area so they cant report on what is happening. if i decide to hate "such and such" country i want to be able to round up their nationals and kick them out

Also depends on what city. Some cities don't require the 4 or 5 star hotels. If your a legal resident, it's not needed anyway. Besides, I seriously doubt if a hostel is a 4 or 5 star hotel. Crimo, I'm going to help you by telling you a little secret. Chinese Citizens have to register for plane, train and even bus tickets. Apartments, cars even hotels. So if someone was to hurt or kill you crimo, they will probably have something to look at, even a lawyer, if you were robbed or wrongfully jailed wouldn't be able to help you if you didn't register. If people didn't register, than how in the world can people put two and two together. Yes, fat chance I know, but man, say that to the foreigner who was just booted for fighting with a Chinese man in a bar in a city he was only visiting but failed to register for two days and the fight wasn't even his fault. He had to exit for 6 months, left his Chinese wife behind and two children. He also thought, it was BS.