Asia stocks drop ahead of US jobs data; China shines

Most Asian stocks fell on Thursday but Shanghai and Taipei were bolstered by bets China's recovery will continue, while the dollar recovered from a three-week low against the euro ahead of the latest U.S. labour market report.

The U.S. unemployment rate is forecast to rise to a 26-year high of 9.6 percent, which would test the most die-hard bulls on the extent of the recovery even after Wednesday's positive manufacturing figures from China, Europe and the United States.

"Manufacturing data from the United States and other major economies came out quite solid, but investors remain cautious ahead of U.S. jobs data and corporate earnings," said Yoo Soo-min, a market analyst at Hyundai Securities in Seoul.

Japanese government bond futures cut their losses after a 2.1 trillion yen ($21.7 billion) auction of 10-year bonds meant to help Tokyo finance stimulus spending drew solid demand. That spread relief among investors worried bond yields may head higher in coming weeks.

Japan's Nikkei share average slipped 0.6 percent but was not far from an eight-month high reached three weeks ago.

The MSCI index of Asia Pacific stocks outside Japan fell about 0.3 percent, dragged by heavyweight Hong Kong's 1.1 percent drop.

The Hang Seng index shed early gains as the mood in the market swung from optimism over upbeat manufacturing data to caution ahead of the U.S. jobs data.

Stocks in Taiwan rose 1.4 percent as investors eager to gain exposure to Chinese economic growth prospects pushed the benchmark TAIEX index to a fresh one-month high.

Valuations of technology firms in Taiwan, on a 12-month forward price-to-earnings basis, have been coming down in the last few months and are currently around 23 times compared with 50 times in April, according to global estimates tracker I/B/E/S.

That has drawn investors to stocks such as mobile phone chipmaker Mediatek, which was up 1.6 percent.

Chinese stocks rose 1.7 percent to a 13-month closing high in heavy trade, with energy and metals shares strong as investors gained confidence in the recovery of the world's third-largest economy.

Singapore shares lost 1.4 percent, while India gained marginally. Korean and Australian shares were mostly flat. The dollar made up some lost ground against major currencies after it fell on Wednesday on news China was seeking debate on proposals for a new global reserve currency at next week's Group of Eight meeting.

However, dealers were cautious about taking big positions ahead of the June U.S. employment report that is expected to show payrolls fell 363,000.

U.S. private employers slashed a bigger-than-expected 473,000 jobs in June, according to a report from ADP Employers Services on Wednesday, making the market wary that the government's data may show more losses than forecast.

"The ADP number was worse than expected so now there might be some downside risk in payrolls which makes it harder to take large positions," said Yuki Sakasai, currency strategist at Barclays Bank Tokyo.

The Australian dollar was down 0.3 percent to US$0.8065, weighed down after trade data showed a much larger-than-expected shortfall of A$556 million.

The 10-year Japanese government bond futures contract was basically flat on the day after the smooth auction results. It had been the first time the benchmark note's monthly sale topped 2.0 trillion yen -- psychologically a level which debt management officials have avoided in the past to encourage smooth market absorption when the issuance size has been hiked.

The end of the first half of the year saw heavy buying of JGBs, especially late maturities, narrowing the difference between the 10-year yield and the 2-year yield by 14 basis points in the last month.

The yield on the benchmark U.S. 10-year Treasury note was at 3.55 percent, roughly where it was at the end of New York's trading day on Wednesday.

U.S. light crude for August delivery slipped to below $69 a barrel, but still within sight of Tuesday's eight-month high of $73.38 a barrel.

The uncertain path of the U.S. economy as well as higher retail fuel prices in China and India were factors that have tempered oil's rise in the last few weeks.

By Kevin Plumberg

(Additional reporting by Charlotte Cooper in TOKYO and Jungyoun Park in SEOUL)

HONG KONG, July 2 (Reuters) -