SHANGHAI, July 15 (Reuters) - The stock market recovery that began in China last week after a slew of government steps to halt a crash ran abruptly out of steam on Wednesday, with markets dropping sharply in afternoon trade despite surprisingly positive economic data.
The CSI300 index fell 4.5 percent to 3,926.54 points at 6:15 GMT, set for its biggest daily fall since July 8, when it closed down nearly 7 percent, while the Shanghai Composite Index lost 4.1 percent to 3,764.18 points.
The worsening sentiment caused index futures to go negative across the board. CSI300 stock index futures for July fell 5.1 percent, to 3,796.8, 129.74 points below the underlying index, while the small cap CSI500 index saw many contracts near their maximum 10 percent daily downside limit.
"Sentiment is still weak," said Du Changchun, analyst at Northeast Securities in Shanghai, noting that he believed most investors were selling to cash in on a brief, if sharp, rally that pushed up indexes over 10 percent last week.
"Non-market based rescue measures are having difficulty getting markets back on the right track in the near term."
Du was referring to steps Beijing has taken to halt a sharp collapse in main indexes, which have included requiring brokerages to buy up shares, cracking down on derivatives markets, including what traders say are deliberate attempts to force those with short positions to take losses, and freezing IPOs to avoid more drains on liquidity.
Standing behind these measures is the central bank, which is providing liquidity to stabilise the market.
The slide highlights the difficulty Beijing faces in restoring confidence in the stock market without signalling to investors that it is guaranteeing a zero-risk free-for-all, which would simply reinflate a rally that even regulators said had become too frothy.
The renewed volatility is particularly worrisome because it comes so soon after markets appeared to have stabilised. When indexes began collapsing in mid-June, repeated efforts by Beijing to stave off a panic, including a surprise double-barrelled policy rate cut, failed, raising doubts over how much influence the government actually has over the stock markets.
Unlike most developed markets, Chinese exchange trading is dominated by retail investors, who are estimated to conduct over 80 percent of transactions in China's stock markets, which currently boast a net market cap of around $8.6 trillion - near the country's annual GDP in 2014.
While they watch the government carefully for signs of policy change, they have historically been resistant to government blandishments to support the stock market.
If markets continue collapsing, it also poses additional political risk to the government, given that state media and local officials have campaigned heavily to get more retail investors to buy shares as a patriotic duty to "defend the stock market". (Additional reporting by the Shanghai newsroom; Editing by Will Waterman)