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CHANGSHA, China -- The expanse where Broad Ltd. makes its giant cooling systems on the outskirts of Changsha, capital of China's inland Hunan province, isn't everybody's idea of what a factory looks like, especially in China.

A scaled-down replica of Buckingham Palace stands a few hundred yards from the cavernous hangars where the air-conditioning systems are built. The palace flies the red flag of the People's Republic of China rather than the British Royal Standard. As the banner flaps in the wind, a group of company recruits jogs by, looking like members of the People's Liberation Army in their camouflage uniforms.

Using a technology that doesn't rely on electricity, the company's coolers end up everywhere from facilities built for the 2004 Athens Olympics to the new Bangkok International airport. Not far from a building where computer banks monitor the performance of the cooling systems all over the world, Zhang Yue, who founded Broad in 1988, houses his helicopter and his jet plane.

Mr. Zhang is the new face of China, where private enterprise was only officially recognized a few years ago. Today, China's entrepreneurs offer a third path between the ailing state enterprises that account for a mere 30% of China's output and the foreign enterprises that account for over half of the country's exports and are increasingly making inroads in the domestic market as well.

If China is to flourish, its best hope lies not in state-owned enterprises, which still rely on government support and subsidized credit, but with a group of entrepreneurs such as Mr. Zhang. This group, which barely existed a decade ago, has had great successes, but they often lack the discipline and experience to build lasting business empires.

The rise of the entrepreneurs comes as capital flows not only to state behemoths, but to new enterprises. "There is a gold rush in China because Chinese entrepreneurs can get capital and use other people's money," says Andy Xie, chief economist for Morgan Stanley in Asia. "They have wild dreams. But you can't always figure out where and how they make money."

"Private entrepreneurs are a transforming force in China," adds Fred Hu, a managing director at Goldman Sachs Group Inc., who divides his time between Beijing and Hong Kong. "But you can't look too closely at most of them." Mr. Hu, who is also from Changsha and sits on the board of Broad, says Mr. Zhang is different.

Unlike Mr. Zhang, 70% of the richest private entrepreneurs in China are property developers, says Morgan Stanley's Mr. Xie. Most of those who aren't developers are essentially traders, buying and selling goods and companies. By contrast, Mr. Zhang makes things for which there is demonstrable demand. At the same time, he is an indirect beneficiary of the real-estate boom, because many of his customers are developers.

Moreover, while most manufacturing in China is all about economies of scale that result in the lowest price, Mr. Zhang says he doesn't compete by undercutting competitors. He says his products are more expensive than those of competitors in Japan and Korea. The equipment used is world class and imported to his Broad factory from all over the world. Mr. Zhang is also unusual in that he is focused on the long term. By contrast, "most entrepreneurs see investment as detracting from profits," says X.D. Yang, co-head of buyout firm Carlyle Group's investments in Asia. "They only draw up one-year budgets. They don't build their companies to last for years and years."

In a world where capital has never been priced realistically, and, until recently, loans were considered government disbursements rather than debt that had to be repaid, Mr. Zhang is careful about how he seeks financing. "He is the only one I have ever met in China who has not asked me to get him money through Goldman," Mr. Hu adds.

Mr. Zhang also invests time and energy in his work force. He recruits from all over China, showing visitors a list of recent recruits and noting how many come from China's top universities.

Certificates attesting to the fact that his company paid more taxes than any other private company are displayed prominently in the executive suite. Last summer Premier Wen Jiabao visited Broad, a trip recorded in glossy marketing materials. "You must be Zhang Yue. I know you!" Premier Wen exclaimed in his greeting," the material states. "Yes I am, Premier, welcome to Broad Town," Mr. Zhang is said to have replied.

Mr. Zhang insists he is a rare breed in China, since he both pays taxes and doesn't pay bribes. He also says his refusal to pay bribes is one reason why he has failed to win certain contracts.

Mr. Zhang has become a spokesman for China's new capitalism, answering questions with observations as pithy as anything Chairman Mao may have come up with. "Failure is a step to success. If you keep trying, you can't fail," he counsels recruits in an address delivered while the group in camouflage stands in front of Broad's five-star guest house. He pens essays outlining his philosophy toward such weighty matters as globalization and environmental degradation.

All this is a far cry from 1992, when he made his first sale, a one million yuan ($125,062) order from Changsha's friendship store. When he first conceived of Broad, China was in the midst of a power shortage and the idea of generating cooling systems that didn't rely on electricity was intrinsically appealing. Unfortunately, later in the decade China had a surplus of power in response to those chronic outages and orders dried up.

Today, conservation has become a top priority of the central government with much of the 11th five-year plan devoted to encouraging conservation. Mr. Zhang says orders continue to flow in for his environmentally correct cooling systems.

Mr. Zhang says he built his empire with 30,000 yuan he earned from an interior-decorating business in Guangzhou, in southern China, early in his career. He says his brother, a graduate of Harbin Institute of Technology, developed the original technology.

Perhaps the most remarkable thing about Mr. Zhang is he has built his business in Changsha, where Chairman Mao grew up and where many take pride in that association. An agricultural province, it was known mainly as the place to go through to get from the cities of the south to Beijing, an overnight train ride away. There were so few economic opportunities, ambitious young people left for the brighter lights of Guangdong.

Mr. Zhang is part of a broader transformation that has seen Hunan produce a spurt of entrepreneurial activity. "If it can happen in Hunan, it can happen anywhere in China," says Mr. Hu.