Beijing had received criticism for choosing Microsoft for the three-year, $3.6m deal instead of homegrown software providers, with an official from the Chinese Science and Technology Ministry calling the deal a threat to national security.
Chinese law stipulates that domestic software should be favoured in such deals.
Nearly two weeks after the contract was signed, the Chinese government's procurement office announced that it has changed its mind.
According to reports, the Chinese government had originally made the decision to place the order with Microsoft after counterfeit software was found to be in use in China's civil service. China currently has a software piracy rate of over 90 per cent, according to the Business Software Alliance.
A Microsoft spokeswoman said: "Microsoft appreciates and supports the measures taken by the Beijing municipal government to strengthen its efforts to legalise software used in government offices. We will actively support and accelerate the commercial negotiations with the municipal government and are committed to continuing our support of the development of the Chinese software industry and economy."
However, the decision could put the software giant at a serious disadvantage in the Chinese market.
It's thought that other government offices may turn their backs on Redmond in order to show they are in step with Beijing.