Hong Kong and Shanghai Launch 'Physical Connectivity' Mechanism: What Makes Gold Trading More Convenient?

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, ushering in a new chapter for interconnection and mutual access between the gold markets of Shanghai and Hong Kong.

What Is “Delivery Connect”?

“Delivery Connect” is a gold circulation mechanism that links the Hong Kong over-the-counter market with the Shanghai exchange-traded market. The Hong Kong Gold Clearing Company has applied to become an international member of the Shanghai Gold Exchange and has opened a physical gold account. Market participants may deposit physical gold into the designated warehouses in Hong Kong under the Shanghai Gold Exchange International Board, enabling gold to be transferred between the Hong Kong Gold Clearing Company system and the Shanghai Gold Exchange system through “two-way transfers.” At present, three banks—Industrial and Commercial Bank of China (Asia), The Hongkong and Shanghai Banking Corporation Limited, 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 Shanghai and Hong Kong gold markets. First, it effectively connects the liquidity of the two markets, allowing participants to take part in transactions in both the Shanghai Gold Exchange’s exchange-traded market and Hong Kong’s over-the-counter market. Second, participants can quickly redeploy eligible physical gold inventory between the two designated warehouses within the same physical storage facility. The system will also connect to a real-time payment settlement system to achieve delivery versus payment settlement, further reducing settlement risk and enhancing overall operational efficiency. John Lee, Chief Executive of the Hong Kong Special Administrative Region, said the 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 “redeployment” under the “Delivery Connect” mechanism is not the same as “deposit equals withdrawal.” What the mechanism refers to is the inventory redeployment of gold between two designated warehouses within the same physical storage facility, with the aim of supporting cross-market trading and settlement—not allowing market participants to freely withdraw gold from the warehouses. At present, the mechanism mainly serves inventory redeployment at the institutional level and account transfers. Whether individual investors can directly withdraw physical gold through this mechanism still awaits further clarification of the specific rules by the authorities.