Prerequisites: Max out Xiao's level 2 friendship
Reward: None
Unlocks: Xiao level 3 friendship
Once you've completed Xiao's first friendship quest you can begin boosting him to the second level of friendship. Xiao is as easy to locate as before, and you'll typically find him working behind the desk on the ground floor of Town Hall. If not here you can sometimes find him on the cliffs to the north of the Church, or in his home in the northwest of Moonbury Town. If Town Hall is open, though, you'll almost know where to look.
Max out the second level of your friendship with Xiao and a notice will go up on the Bulletin Boards of Moonbury. Apparently Myer wants to speak with Xiao at Town Hall. (He couldn't have just gone downstairs and asked?) You can find them together from 8:00 to 15:00, Monday to Saturday.
Pay Town Hall a visit and you'll find Xiao attempting to cover for Rue, who jumps in and takes the blame for making Town Hall a bit of a mess. Once Myer leaves you'll help Xiao haul a bunch of books back to Myer's House, and Xiao will get ever-so-slightly flirtatious in the process. The quest ends with your relationship jump to the third level. Continue to improve your relationship with Xiao and you'll unlock the next quest in his storyline, A Token of Appreciation.