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Asian stocks extend selloff; China hit by Morgan Stanley downgrade

Asian stocks remained in the doldrums on Thursday, hit by a confluence of factors, which includes a weaker finish on Wall Street overnight, growth worries in Australia and jitters over tighter margin trading rules in China.

Overnight, U.S. markets were spooked by higher bond yields and as investors weighed the ADP Employment Report which showed 169,000 jobs created in April, missing expectations for a rise of 200,000.

While the ADP report focuses on the U.S. private sector, it is usually seen as a pre-cursor to the all-important nonfarm payrolls data released by the Bureau of Labor Statistics on Friday. A Reuters poll expects the U.S. to add 208,000 jobs in April, after posting its worst report since December 2013 in March with the creation of 126,000 jobs.

Meanwhile, comments from Federal Reserve chair Janet Yellen that the equities market is overvalued added to the market anxiety. As a result, the blue-chip Dow and the S&P 500 dropped 0.5 percent each, while the Nasdaq Composite shed 0.4 percent.

Asia-Pacific Market Indexes Chart

Mainland markets fall

China's Shanghai Composite index chalked up a third straight day of steep declines, diving 2.8 percent due to persisting worries over further government measures curbing speculation and the possibility that new stock listings may sap funds from existing equities. The Shanghai bourse had fallen nearly 6 percent over the last two sessions.

Morgan Stanley downgraded the MSCI China index - which captures large and mid-cap Chinese companies listed in Hong Kong - to equal-weight, from overweight, marking the first downgrade in seven and a half years. "Dramatic recent outperformance has led to a deterioration in absolute and relative valuations and a technically overbought situation," analysts wrote in a report released early Thursday.

And Morgan Stanley is not alone. "Onshore A-share market performance over the last 6 months have been incredible... and I think they are now catching up to reality and more appropriate valuations. After all, the run up has been a bit too far and too fast," Bruno Del Ama, CEO of Global X Funds, told CNBC's "The Rundown."

Among the most active stocks, China Shipbuilding and China State Construction Engineering fell by the daily limit of 10 percent, while Agricultural Bank of China erased 1.6 percent.

Hong Kong's Hang Seng index took cues from their mainland peers to settle 1.3 percent lower at its lowest level since April 20.

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Nikkei drops 1.2%

Japan's Nikkei 225, which reopens for its first trading session this week after being shuttered for the Golden Week holiday since Monday, closed at a a one-month low.

Heavyweight components were among the early laggards; mobile carrier Softbank tumbled 3.4 percent, while Fanuc and Fast Retailing shaved off 3.5 and 1 percent, respectively.

Education business firm Benesse Holdings tumbled nearly 20 percent to its lowest level since November 2004 on the back of announcing a net loss for the final year ended March.

Bucking the downtrend was Renesas Electronics, which tacked on 7.1 percent after the Nikkei business daily reported that the company is expected to see a net profit of more than 80 billion yen for the year ended March 31.

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ASX drops 0.8%

Australia's S&P ASX 200 extended Wednesday's plunge to close at a three-month trough as investors weighed National Australia Bank's earnings release and concerns over whether the Reserve Bank of Australia (RBA) is putting a stop to its easing cycle despite faltering economic growth.

Before the market open, the country's fourth-biggest lender by market capitalization met expectations with a 5.4 percent rise in first-half cash earnings and unexpectedly announced a A$5.5 billion rights issue. NAB has requested for a trading halt following the announcement.

Other major lenders finished mixed; Commonwealth Bank of Australia inched up 0.2 percent, while Westpac and Australia and New Zealand Banking Group sagged 0.3 and 0.6 percent each. Investment bank Macquarie, which reports full-year earnings on Friday, dropped 0.5 percent.

Firmer iron ore and oil prices overnight failed to support the resources sector; Oil Search and Woodside Petroleum sagged more than 1 percent each, while BHP Billiton widened losses steadily to 1.4 percent following a shareholder approval for the demerger of the miner's smaller assets into South32.

On the domestic data front, the Australian economy lost 2,900 jobs last month, missing expectations for a creation of 5,000 jobs and significantly lower than the 37,700 jobs added in March. The Australian dollar was little moved on the data miss, last quoted at $0.7978 against the U.S. dollar.

"The April jobs report is unlikely to have significant implications for the RBA or the outlook for interest rates," Shane Oliver, head of Investment Strategy & chief economist at AMP Capital said. "Our base case remains that rates are on hold at 2 percent, but with the risks on the downside particularly if the Aussie dollar misbehaves."

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Kospi loses 0.7%

South Korea's key Kospi index tracked region-wide declines to finish at near four-week low.

Among the top five weighted stocks, steelmaker Posco and Shinhan Financial slumped 2.4 and 3.2 percent, respectively, while Samsung Electronics notched up 0.6 percent after sinking 2.7 percent in the previous session. The South Korean tech giant said on Thursday that its new $14 billion chip plant will begin production sometime in the first six months of 2017.

Meanwhile, Cheil Industries plummeted 10.7 percent after local media reports said that parent Samsung Group would not turn the fashion and leisure firm into a holding company.

Mobile carrier SK Telecom receded 3.3 percent, extending a 3.6 percent slump in the previous after its first-quarter net income missed market expectations.

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Rest of Asia

India's benchmark BSE index and the broader Nifty index finished lower by 0.5 percent, respectively, as foreign investors continued to take flight amid worries over the country's retrospective tax. Both indices hovered near their lowest levels since December 17.

Meanwhile, Malaysian equities finished lower ahead of a rate decision by the country's central bank which kept its policy rate unchanged on Thursday.