The prosperity of China’s real estate market has two opposite effects on the manufacturing sector, namely the crowding-out effect and the promoting effect. The sixth chapter of this book examines the mechanism of the promoting effect, while this chapter focuses on the crowding-out effect of the expansion of the real estate sector on the manufacturing upgrading. The analysis indicates that when the market keeping prosperous; the behaviors of local governments, manufacturing firms, and the banking system all changed significantly. The government relaxed the regulation on the investment demand for housing, while providing policy stimulating real estate development investment. Urban economic growth has become increasingly dependent on the real estate sector. Manufacturing are facing an increase in factor prices and a reduction in product demand, leading to a decline in profit margins. The profit gap between departments guided some industrial capital to flow into the real estate sector. The banking system tends to allocate more loans to support real estate developers rather than manufacturing firms. These situations are very unfavorable for the manufacturing upgrading. The government needs to reform of the fiscal and tax systems, strengthen the regulation on the real estate market, and introduce supportive industrial policies.