<p>Due to the presence of free iron oxides (FIOs), even though lateritic clay has a high porosity, it has high strength and low compressibility. The variation in the climate and physio-chemical environment can reduce significantly FIOs content. To comprehensively investigate the effect of FIOs on the hydro-mechanical behaviour, a FIOs removing method was adopted in this study to remove FIOs in Guilin lateritic clay. Then, the water retention capacity, shrinkage deformation, shear strength and microstructure of compacted lateritic clay with/without FIOs removal processes were experimentally investigated. Results revealed that according to the comparisons of soil-water retention curves (SWRC), FIOs can affect significantly SWRC in medium suction range. After removing the FIOs, the shrinkage deformation became more significant. Due to the existence of FIOs, larger shear strengths were observed before removing the FIOs. The effect of FIOs on the hydro-mechanical behaviour can be interpreted from the perspective of microstructural alteration (Mercury intrusion porosimetry and scanning electron microscopy tests). FIOs mainly exist in the forms of “coating” and “bridge” in lateritic clay. The cementation of FIOs can improve the soil strength and the resistance of the soil skeleton to deformation. Once FIOs are removed, bonds between soil particles are weakened and even broken, leading to increased water retention and shrinkage capacities and decreased shear strength. The findings of this paper provide new insights into how FIOs enhance the hydro-mechanical behaviour of lateritic clay.</p>