This paper constructs a regulatory government competition framework based on taking local governments as regional regulators, and systematically analyzes the formation mechanism of China’s structural slowdown from the perspective of overcapacity in heavy industry. The study found that under the role of the regulatory government competition framework, the local government, the main body of regulation, mainly achieved output growth by reducing the price of intermediate products. However, the embeddedness and imperfect supervision of the monopoly in the intermediate product sector has led to a new type of regulation failure, that is, the growth-type regulator, the local government, and the exclusive monopoly energy supplier have reached a tacit “conspiracy” to set a lower electricity price for heavy industry, and set or implement a higher electricity price for small industry and commerce, thus forming the distortion of the balanced electricity price structure and the “vortex” of heavy industry. This “vortex” will not only cause overcapacity in heavy industry, but also form a system that is relatively independent of the overall economic operation, and will have a significant crowding-out effect on the overall economic growth in the long term, thus becoming an important cause of China’s structural slowdown under the “new normal”.