Market faith has proven fragile, as stocks continued their losing streak despite policy support and the benchmark Shanghai index retreated by the biggest three-week decline since 1992.

The Shanghai Composite Index dived 5.8 percent to finish at 3,686.92 after swinging nearly 300 points, while the Shenzhen Component Index slumped 5.3 percent to 12,246.06.

About $2.8 trillion of market value has evaporated over the past three weeks, even as securities regulator failed to keep margin investors from unwinding positions at a record pace.

The outstanding balance of margin debts fell for a 10th day as of Thursday from a record high, according to Shanghai Stock Exchange.

"Though jettisons among margin traders may come to an end, the recent plunge in general triggered a pessimistic sentiment, which sent the markets on a down spiral," said Yang Delong, chief strategist at China Southern Asset Management.

"Investors will come around, as regulators unleash more boosting policies," said Yang, adding that by sparing no effort to stem the plunge, State-owned financial institutions may step in with "real money" to buy shares.

Nearly 1,000 stocks sank to a daily halt on Friday, led by utility, environment and sports sectors.

The worst monthly slump in Chinese stocks in two years wiped away more than $34 billion in combined net worth of the richest people in mainland and Hong Kong in June, according to statistics compiled by Bloomberg.

Supportive policies

The country's securities watchdog made late-night announcements over the past week, vowing to relax on the margin trading rules and investigate market manipulation.

Zhang Xiaojun of the China Securities Regulatory Commission said on Thursday that the CSRC will examine short-selling activities for stock-index futures for suspected manipulation.

The amended rules on margin trading, whose draft were scheduled to be on public consultation till July 11, were released on Wednesday evening "in haste for special circumstances", said the securities watchdog.

According to the amendment, brokerages and margin investors can decide through discussion on when and how much percentage of additional guaranty should be put instead of compulsory sell-off.

The previous rule stipulated that investors should make additional guaranty in two trading days if the ratio of capital they borrowed from brokerages reaches the 130 percent of warning level.

Brokerages will be able to extend contracts with their clients as long as the maximum term is under 6 months, the amendment said.

The securities watchdog also announced allowing brokerages to issue bonds and explore securitization of margin trading business to widen their funding channels.

In addition, Shanghai and Shenzhen stock exchanges announced a 30 percent cut on transaction fees to boost the markets.

Fees have been cut to 0.0487 permillage from 0.0696 permillage of the transaction volume for A-share trading, with 20 percent of the charges transferred to an investor protection fund, according to a joint statement of the two bourses.

Market volatility has increased over the past weeks as investors diverge on whether A-share's year-long bull was peaked.