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The global credit crisis has hit Asia with a vengeance for the first time, triggering a massive flight to safety as investors across the region pull out of risky assets.Yields on three-month deposits in China and Korea have plummeted to near 1pc in a spectacular fall over recent days, caused by panic withdrawls from money market funds and credit derivatives."This is a severe warning sign," said Hans Redeker, currency chief at BNP Paribas. "Asia ignored the credit crunch in August but now we're seeing the poison beginning to paralyse the whole global economy," he said.Korean and Chinese three-month yields have fallen from 4pc to 1pc in a matter of days in a eerie replay of events on Wall Street in late August when flight from banks and the US commercial paper markets caused yields on three-month Treasuries to falls at the fastest rate ever recorded. Asian investors appear to be opting for deposit accounts with government guarantees.It is unclear what prompted this latest "heart attack" in the credit system, though rumours abound that Asian banks have yet to own up to their share of the expected $400bn to $500bn losses from the US mortgage debacle.Stock markets were battered across the region. The Hang Seng index in Hong Kong fell 4.15pc, while Tokyo's Nikkei slumped to the lowest level in a year and a half, dragged down by the shares of the 'Seven Samurai' exporters.Asian jitters set off fresh turmoil on Europe's credit markets. The iTraxx index measuring default insurance on bank and insurance bonds hit an all-time high of 63.5."The whole financial market is in turmoil with Bund-Swap-Spreads going through the roof," said Andrew Guy, director of ADG Capital Management.Marcus Schuler, director of credit marketing at Deutsche Bank, said spreads on low-grade European bonds had been jumping ten basis points a day for the last week. "There's been risk aversion across the board," he said.In a rare move, the European Covered Bond Council said it was suspending trading of mortgage-linked bonds in the inter-bank-market owing to the "undue over-acceleration in the widening of spreads".Abbey National today cancelled its sale of covered bonds, the third company to withdraw an issue this week.Charles Dumas, chief strategist for Lombard Street Research, said credit woes had led to an alarming spike in the 'Ted spread' between commercial Libor and US Treasury bills, now near 150 basis points. "Libor is at a premium to T-bills not matched the great crash in 1987," he said.Mr Redcker said the flight from risk has led to a sudden unwinding of the $1,200bn yen "carry trade" as hedge funds and Japanese investors close risky positions. The yen has snapped back violently from yen118 to yen108 against the dollar since early October, with similar moves against other Anglo-Saxon currencies."We're seeing a liquidation of the carry trade. For years it created liquidity for global equities in an upward spiral, but this has now turned into a downward spiral. Base metal prices are falling, which that tells us that Asia may not be as strong as we thought," he said.Copper prices fell 6.4 percent in Shanghai today. It follows data showing China's copper imports fell 4.4pc in October, a sign that central bank moves to choke off credit is starting to slow runaway investment in heavy industry and construction.Jerry Lou, China analyst for Morgan Stanley, said the Shanghai bourse-already down 15pc-was now the word's "biggest valuation bubble". "Lessons from Japan in the late 1980s show that once the stock market starts to head down, earnings and multiple contraction can together crush the market like a market rolling downhill," he said.As in the days of Noah....
