There are several issues in entering the Chinese market.
1. Microsoft cannot get a premier price for their product in China. Prices are controlled by the government. The lower margins create a gray market for product, as product can be bought in China and then sold elsewhere. Additionally, since Hong Kong is now part of China, it allows greater access to Chinese goods.
2. The aforementioned copyright laws. Or lack thereof. The problem is that the government does not enfore the laws, and until China is part of the WTO, the are not held to international copyright laws.
3. Though there are 1.25 billion chinese, there are far less people who have computers. The market size for software to be used in China is probably 500 million, definitely important to their growth strategy, but I believe the Indian market is larger for such technology.