In my tests, your code produces exactly the output you are asking
for.
I've also tested (with `xsltproc` instead of Saxon, as I presume MK
tested w/ Saxon) and got the desired output. That said, I like Ken
Holman's approach much better:
<xsl:template match="x" >
<xsl:apply-templates select=".//z"/>
</xsl:template>
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