Uncertainty over the country's economic outlook and the devaluation of the Yuan have led to a sell-off
Chinese markets have lurched up and down as regulators gradually withdraw measures that were imposed after the main stock index plummeted in June.
A similar drop on Monday caused a sell-off on Wall Street and other markets around the world.
Trading was suspended on Thursday after a market index, the CSI 300, dropped 7% half an hour after markets opened, triggering a "circuit breaker" that came into effect on 1 January.
Analysts have warned Chinese markets are likely to be highly volatile in the near future as they seek a stable level following last year's turmoil.
For the "circuit breaker" - a 15-minute pause in trading - to be activated the CSI 300 must fall 5% within 30 minutes.
However, Thursday's decline was so fast that before that could take effect, the index hit the 7% limit that ended trading for the day.
Meanwhile, the benchmark Shanghai Composite Index fell 7.3% to 3,115.89, while the Shenzhen Composite Index for China's smaller second exchange slumped 8.3% to 1,955.88.
A six-month ban on sales by shareholders who own more than 5% of a company was due to expire on Thursday.
Regulators said this week that such sales will be limited to private transactions to avoid fuelling further volatility.
The Shanghai benchmark more than doubled from the end of 2014 and its peak in June as millions of novice investors bought shares.
But prices plummeted by 30% after that, triggering a panicked response by the government.
Regulators banned large sales, cut interest rates, cancelled initial public stock offerings and ordered state companies to buy shares.
Chinese leaders had encouraged members of the public to buy shares with the hope of raising money to overhaul state industry.