Abstract: In southern China, there are a great amount of red clay(laterite) which contains some free ferric oxide. Owing to its composition and microstructure developed under hot, wet soil-forming conditions, the clay has several special characteristics. Although the water content and void ratio of laterite are greater than similar clay soils, its strength is still higher than the others. There seems to be a contradiction between its physical parameters and mechanical properties. In this paper, the effect of free ferric oxide in laterite on its engineering properties, such as strength, swelling properties and others is discussed. The research result shows that special properties of laterite are the result of various conditions of formation, loss and crystallization degree of free ferric oxide, and its physical and mechanical properties will change with variation of physicochemical circumstance.