Industrial policy will generally support the development of key industries, promoting industrial upgrading; but at the same time it also will disrupt the market fair, leading to resource misallocation. In this paper, with multi-linear model, more than 700,000 companies’ data samples from China's industrial enterprises database (1999-2007) is used to study the affection of industrial policy on capital allocation efficiency. The empirical results show: industrial policy will reduce the efficiency of capital allocation, the negative impact on capital allocation efficiency of private enterprise is more serious; how the industrial policy is implemented is influenced by the relationship between the government and the market, and good government and market relations can enhance the effectiveness of industrial policy ; financial mismatch positively impact the capital allocation efficiency of enterprises, which will be weaken by the industrial policy; further analysis showed that major industrial policy can improve the efficiency of capital allocation. Conclusions indicate past basin flooding irrigation kind of industrial policy is inefficient, the focus of industrial policy should help companies get viability. Industrial policy can not completely rely on the government, and a better way is through improving the relationship between government and the market, letting the market play a leading role in resource allocation.