The Australian former world champion dropped three straight frames before he was able to claw one back, but it was too late to stage a comeback as his opponent quickly wrapped up victory in the fifth.
Xiao, ranked 34th, will face the winner of Ryan Day's match with Ricky Walden.
England's Jack Lisowski survived a first-round scare to beat compatriot Robert Milkins 4-3.
Milkins, ranked 31st on the World Snooker Tour, won the opening frame then two of the next three to find himself on the edge of victory.
But 12th-ranked Lisowski had other ideas and regrouped, making consecutive breaks of 60, 102 and 86 and winning the decider to book an appointment with China's Zhou Yuelong in round two.
Zhou clinched a 4-3 win against Thepchaiya Un-Nooh, courtesy of a 107 break - Zhou's second century of the match - in the deciding frame.
Mark Allen bounced back from a 6-0 first-round defeat against Barry Hawkins in the Masters to reach the last 16 with a 4-2 victory over Dave Gilbert.
Gilbert led 2-1 before Allen reeled off three successive frames, including a 133 break.