With system virtualization, the hypervisor provides a full virtual machine to a guest: the entire OS image including the kernel is now dedicated to the virtual machine. CPU virtualization is used to provide each guest with an exclusive view of a full system environment, and these mechanisms also ensure isolation from other guests. Hypervisor-based management of virtual CPUs, memory and I/O devices is used to define resource consumption of guests.
Which one is better?
As always, it depends on your needs. If you just want to have a number of separate instances to run applications, a container environment often provides greater efficiency, both in managing the application environment, starting the application instances, and in resource consumption. Simple modification and deployment of application environments has been a design principle of container solutions like Docker and is entirely in the DevOps spirit (guess you just have been waiting for more buzzwords).
If you want to have best isolation of environments and come from a server virtualization perspective, then system virtualization may be more relevant: Noisy neighbours are much less of an issue than with containers. While many of the container folks currently focus on improving container isolation, virtual machine isolation is still superior. Coming from physical servers, virtual servers are a natural step, and an existing ecosystem around server management can often be applied to virtual servers, too.
On z systems, Linux has good scalability (to run containers), but z is the platform with an extremely efficient virtualization technology (to run virtual servers), and it is inherent in the entire system architecture. Without having measured it, combining the technologies is probably less painful on z Systems than on other platforms.
There is a third way: both.
Combining system virtualization with containers can be done in multiple ways:
1. A Virtual Machine in a Container
2. A Container in a Virtual Machine
2b. Multiple Containers in a Virtual Machine
To summarize: it depends.