Hong Kong and Shanghai launch "Physical Connectivity" mechanism - where is the convenience for gold trading?

The Hong Kong Gold Central Clearing and Settlement System officially began trial operations on July 7. As one of the core supporting measures, the Financial Services and the Treasury Bureau, together with the Shanghai Gold Exchange, simultaneously launched the first phase of the “Delivery Connect” mechanism, opening a new chapter for connectivity between the gold markets in Shanghai and Hong Kong.

What Is “Delivery Connect”?

“Delivery Connect” is a gold transfer mechanism that connects the Hong Kong over-the-counter market and the Shanghai on-exchange market. The HK Gold Clearing House has applied to become an international member of the Shanghai Gold Exchange and has opened physical gold accounts. Market participants may deposit physical gold into the designated Hong Kong vaults of the Shanghai Gold Exchange’s international board. Through “two-way transfers,” gold can be circulated between the HK Gold Clearing House’s system and the Shanghai Gold Exchange’s system. At present, three banks—Industrial and Commercial Bank of China (Asia), The Hongkong and Shanghai Banking Corporation, and Bank of China (Hong Kong)—have completed two-way transfer operations as the first batch of market participants.

Practical Benefits

The launch of “Delivery Connect” brings multiple benefits to the gold markets of Shanghai and Hong Kong. First, it effectively connects the liquidity of the two markets, enabling participants to trade in both the Shanghai Gold Exchange’s on-exchange market and Hong Kong’s over-the-counter market at the same time. Second, within the same physical storage facility, participants can quickly transfer eligible physical gold inventory between two designated vaults. The system will also link to the real-time payment and settlement system to enable “Delivery Versus Payment” (DVP) settlement, further reducing settlement risk and improving overall operational efficiency. Hong Kong Special Administrative Region Chief Executive John Lee said that this mechanism establishes a streamlined process for participants, allowing them to use their gold holdings to settle transactions in both the Hong Kong and Shanghai markets.

Delivery Connect Does Not Equal Physical Withdrawal

It is important to note that the “transfer” under the “Delivery Connect” mechanism is not “deposit and withdraw on demand.” What the mechanism refers to is the transfer of gold inventory between two designated vaults within the same physical storage facility, with the purpose of supporting cross-market transactions and settlement, rather than allowing market participants to arbitrarily withdraw gold from the vaults. At present, the mechanism mainly serves inventory transfers and account transfers at the institutional level. Whether individual investors can directly withdraw physical gold through this mechanism still awaits further clarification of the specific rules by the authorities.