Prerequisites: Max out Xiao's level 1 friendship
Reward: None
Unlocks: Xiao level 2 friendship, A Helping Hand
Befriending Xiao is not too difficult. As the mayor's assistant Xiao spends much of his days behind the desk on the ground floor of Town Hall, and a number of daily chores will take you into or past this building. You can also often find Xiao meditating at the cape to the north of the Church, and his house is on the northwest side of Moonbury Town.
Check the Bulletin Board once you've maxed out Xiao's first level friendship meter and you'll find a notice for Rue, inviting her to check out some newly-arrived books. Head to Town Hall between 8:00 and 15:00, Monday to Saturday, to trigger the cut scene for the quest.
Inside the Town Hall you'll find Xiao chatting with Dev about the books, and Rue will show up mid-conversation. She has no interest in Xiao's books, however, and takes off. It's your job to find some reading material that Rue will like. Speak to Lucke - he's usually over at the Farmhouse - and he'll give you a Textbook to pass off to Xiao.
Take the book to Xiao and, after a quick cut scene in his home, you'll complete the quest. This will improve your relationship with Xiao and allow you to begin building up his relationship meter again. This will also put you on the road to A Helping Hand, the next quest in Xiao's storyline.