Despite the Politburo’s best efforts (which now include the imposition of what amount to new capital controls), capital continues to flow out of China.

Put simply: all signs point to further RMB depreciation and no one wants to stick around to see how low the yuan will ultimately go before the PBoC finally throws in the towel and moves to a free float. Indeed, it’s not even clear that letting the currency drop to a market clearing rate would relieve the pressure, as these things tend to become self-fulfilling.

(Chart: Bloomberg)

As I’ve been over more times than I care to count, China simply has no choice but to devalue against the dollar. Why? Because they’re determined to maintain the illusion of FX stability by nudging markets to focus on a trade-weighted basket adopted as a reference point in December of 2015.

The problem is, when the USD rises against the currencies of China’s trading partners, Beijing has to push the yuan lower against the dollar to keep the basket stable. That means that in markets characterized by a structurally strong dollar, the PBoC has no choice but to devalue, lest the RMB should appreciate against the basket. Here’s a table from Citi I posted some time ago that illustrates this dynamic:

(Table: Citi)

Needless to say, all signs point to continued dollar strength as the policy divergence between the Fed and other DM central banks continues to grow.

Earlier today, Goldman outlined still another potential headwind for the yuan. Consider the following:

There are several elements to China’s balance of payments. Exhibit 5 shows the current account, breaking down the goods trade balance into its oil and non-oil components. In 2016, China is likely to import around 2.8bn barrels of oil on a net basis (up from around 2.4bn barrels in 2015), so that a $10 change in the annual average price of oil impacts the trade balance to the tune of around $28bn. Indeed, the average price of oil fell from $97 per barrel in 2014 to $51 in 2015, yielding a drop in the oil deficit close to $100bn (from -$216bn to -$124bn), after allowing for some rise in oil import volumes. Oil prices averaged $41 in 2016, another positive terms-of-trade shock for China that narrowed the oil deficit still further to -$114bn. If we assume that the oil price stays near current levels for 2017, this should see the oil deficit narrow back out again, conceivably to something like – $165bn, meaning that the beneficial effects from the downtrend in oil prices are now in the rear-view mirror. Indeed, this is likely to see the current account surplus fall further, from what looks to be +$268bn in 2016 (down from +$331bn in 2015) to conceivably as low as around +$200bn in 2017. Seen against the backdrop of likely continued negative net FDI flows and large capital outflows – we have pencilled in – $100bn and -$500bn respectively – reserve losses could conceivably exceed those in 2015 and 2016. This could happen even with the pace of capital outflows continuing to slow from their 2015 and 2016 levels, which underscores how important a weaker current account outlook potentially is in a setting in which other components of the balance of payments are already negative.

The point is, increasing oil prices translate to a negative terms-of-trade shock as the current account surplus falls. Set against a backdrop of rising capital outflows, the outlook for the RMB (and thus for China’s FX reserve stash) darkens materially.

But wait, there’s more. As WSJ reports, the slumping yuan could encourage corporates who have borrowed in dollars to repay their debts earlier in order to avoid coping with an even weaker RMB later on down the road. Here’s more:

The large pile of foreign debt owed by Chinese companies, from state-owned banks to airlines, is giving added impetus to Beijing’s efforts to keep the yuan from falling too steeply against the rallying dollar.

Chinese companies with large amounts of dollar debts represent another motivation for stepped-up controls, economists and officials say. Those firms draw most of their revenue from domestic businesses, and a weakening Chinese currency requires them to expend more yuan to pay off the same amount of dollar debt—hurting their profits and encouraging them to pay off their dollar debts early. That could propel even more outflows, further weakening the currency.

“Most of China’s short-term external debts are concentrated in the business sector,” said Sheng Songcheng, a senior adviser at the People’s Bank of China. “The one-way depreciation expectations for the yuan could lead companies to buy foreign currencies to repay those debts even before they come due, potentially adding to the depreciation expectations.”

Right, so yet another self-feeding doom loop. Think about it: companies are paying off their dollar debt in order to dodge further RMB depreciation, but in doing so they’re driving … wait for it … further RMB depreciation, which means the very act of getting out of the way makes the situation that much worse for companies who haven’t yet paid down their foreign debt.

There’s really only one way to stop this: float the RMB. But then again, that could trigger the very same vicious cycle. That is, it could feed speculation about further RMB weakness which would in turn cause more people to take steps aimed at avoiding the oncoming FX freight train, and those efforts could in turn prompt still more speculation, and around we go…