Nicolas Otamendi gave City the lead (52) from close-range in a game full of chances, before Raheem Sterling doubled their lead with a low finish from Kevin De Bruyne's pass (59).
John Stones added a third (66) as City turned on the style in LA, before substitute Brahim Diaz made it 4-0 with a superb strike (81).
Arnaiz Oscar scored with a fine 30-yard effort (90) but it was only a consolation for the European champions.
Sky Bet have priced up City as the 15/8 favourites to win the Premier League title (the online bookmaker pays three places instead of two on each-way bets).
City are on offer at 12/1 with Sky Bet to win the Champions League. Defending champions Real are joint-favourites at 5/1 alongside Barcelona and Bayern Munich.
Pep Guardiola handed new signing Danilo his City debut against his former club, while Gareth Bale and Karim Benzema started for Real Madrid at the Coliseum.
The first half was a tale of two goalkeepers, with Ederson making the first save of note by tipping away Isco's curling effort from just outside the box.
Keylor Navas then denied Gabriel Jesus with his feet on 25 minutes, and the Real stopper pulled off another world-class stop from point-blank range as Sergio Aguero found acres of space in the penalty area.
Real then hit the post through Casemiro with a back-post header from Isco's cross, before Benzema's effort from an angle was turned away by Ederson again.
City improved in the second half and went ahead seven minutes after the restart through Otamendi, who reacted fastest at the back post to convert from close range after Stones' header was saved by Kiko Casilla.
It was 2-0 just seven minutes later through half-time substitute Sterling, finishing past Casilla after fine work by De Bruyne on the right channel to play him through on goal.
De Bruyne was the architect once again for the third, picking out Stones with a low ball from a short corner for the defender to sweep home with a fine finish from 12 yards.
Sub Leroy Sane nearly made it four, hitting the post from an acute angle, but 17-year-old Diaz did, finding the top left-hand corner with a fine strike after being set-up by Patrick Roberts.
Real youngster Oscar scored a superb consolation, picking the ball up 30 yards out before hitting an unstoppable drive into the top corner with the last kick of the game.
Guardiola praised his players for their performance.
The City manager, in quotes carried on the club's Twitter account, said: "The result is not so important but the way we fought for each other is.
"I'm proud of the way my team fought together."
Real Madrid manager Zinedine Zidane was disappointed with the result but vowed not to dwell on it too much.
Speaking on the club's website, he said: "I'm not happy about the loss, of course. We did not play a bad game but it is a bad result.
"We are in preparation, it is the second game. No more talk about what has happened, we lose and that's it."
