Chinese shares were lower on Wednesday as concerns over the health of China's economy persist.

Shanghai Composite Index slid 0.2% to 3160.17 points on wobbly trade Wednesday, the last trading day this week. Chinese markets will be closed during the public holiday. The index dropped by nearly 2% in the afternoon before recovering lost ground in late trade.

The weak manufacturing data released Tuesday also weighed on market sentiment.

"Consistency from both official and non-official data indicates significant downward pressure to production momentum in the third quarter this year," Dong Tao, research analyst at Credit Suisse writes in a research note.

China's growing debt is also a concern. On August 29, the National Development and Reform Commission (NDRC) announced a 16 trillion renminbi (US$2.5 trillion) cap on local government debt as of December 2015. It is made up of 15.4 trillion renminbi as of 2014 and 0.6 trillion renminbi in new debt quota approved for this year.

"The amount is much smaller than we expected. And this could mean higher default risk in the financial system and lower infrastructure spending," David Cui, strategist at Bank of America Merrill Lynch says in a note.

According to Cui, the central government has essentially capped its repayment liability for local debt at 16 trillion yuan versus the 30 trillion total at the end of 2014 as estimated by the Chinese Academy of Social Science (CASS) and published in late July.

This suggests the 14.6 trillion renminbi in local borrowings at the end of 2014 that is not covered in the cap could be facing default risk.

"We believe credit spread of these debts could widen considerably and some defaults may show up reasonably soon (unless the government doesn't follow through with the cap). This could generate another shock in an already-fragile financial system and we reiterate our recommendation to avoid financials & infrastructure related sectors in China," Cui says.