The way to create a new element is like this:
You need to understand a very basic concept in XSLT: a stylesheet doesn't generate a file containing lexical markup, it generates a tree containing nodes, which is then passed to a serializer to be serialized. The NEWXMLELEMENT element node in this stylesheet gets copied to create a NEWXMLELEMENT node in your result tree, and the serializer takes this element node and produces the angle bracket markup. If you try to generate markup (start and end tags) by hand, it becomes the content of a text node, which the serializer processes by escaping any special characters it finds.
Author, XSLT Programmer's Reference and XPath 2.0 Programmer's Reference