Basics & Notation

Learning the basics of the Xiao is an integral step. While much of the music theory is the same as western concepts, there are some unique differences that, if anything, actually simplify the learning of this wind instrument.

How to Hold the Xiao

The first thing to learn is how to properly hold the flute. The Xiao should be held at a 45 degree angle down from the mouth. If you have a flute with a cutout slot for blowing into you should place the edge of the hole on the bottom part of your bottom lip. The place where the lip changes into skin is sensitive and you should be able to find the proper position with practice. From here, the left hand grasps the top, covering the back hole with the thumb and the next three holes with the index, middle, and ring fingers respectively. The small finger should be placed lightly on the top of the flute. The right hand fingers close over the bottom four holes with the small finger covering the last one that is normally placed at a slight angle to ensure a good fit. Instead of using the tips of the fingers, you should use the pads of the fingers. There are two different grips that are traditionally used, the half and the full piper. 
Once the positioning is clear and makes a good fit completely covering each hole, a steady blow out (much like you would if you were whistling or blowing through a narrow straw) will result in a clear tone emanating from each finger positioning. 

Half Piper

Finger position with placement of first finger pads over holes. A beginner finger positioning.

Full Piper

Finger position with placement of second finger pads over holes. A more advanced and traditional positioning.
Reference Notes:
-"Slow/Normal/Strong" are notes on the character of the blowing strength
-The holes are counted from the bottom up. The farthest away hole is #1 and the hole on the back, covered by the thumb, is #8
-The bottom keys are referenced as the original key of the xiao.
-A solid circle is played covered, a white circle is played open, and a half circle is a half note, played with the finger slightly opening on the hole.
-A sharp note is referenced with a "#" sign, and a flat note is characterized by a "b".
-For further notes please read below.

Xiao Keys

The most basic and standard Xiao flute that will most often be referenced is the G Key flute. This is the one that offers the most basic fingering positions and ease of playing as the sound hole is typically more narrow which allows for blowing strength to be be more reserved. This in turn allows for much longer note sustains and clearer sound once the basics are practiced regularly. The G Key is also most often the associated key that traditional music is played in. Especially in the beginning stages.
Even so, the unique characteristics of the Xiao allow for quite a lot of versatility. While many songs are originally in G key, it is not too difficult to change key and achieve the same pitch on a F Key flute for example. However, this is a more adept skill. For a beginner, once notation is understood, one can simply play the same music in whatever key your flute is in. You can play most music in a separate key just by dropping or raising to the original key of your own flute. Conversely, you can play a different fingering on your own flute to achieve a similar result. In the beginning, this is ok. Although it should be noted that this will not be as simple once you are orchestrating music with others. This is when a good musical theory comprehension will be handy.
The origin key of the flute that you have will be inscribed by the fourth note (counting from the bottom). While western winds instruments are typically categorized by the lowest note played (all holes covered/pressed), Chinese flutes are titled by the fourth note. This is the note received when all holes are covered with the left hand only. In this case, a western categorization would deem xiao in G Key as a C Key. Herein, we will maintain the Chinese tradition and call the G Key flutes as this is the common vernacular that you will find if you further your study with other sources.

Musical Notation

Notes in the standard notation for the xiao have been recorded in various ways in the past. The modern surviving method that is the most familiar throughout musicians is Jian Pu. This is basically a notation form of the "Do-Re-Mi.." scale. While there are versions that are adapted to the western sheet music standard, the mot wide spread use is still of Jian Pu through out China. It is a very intuitive and simple system. Numbers are made as stand-ins for the classic Do Re Mi scale. For example, 1 = Do, 2 = Re, 3 = Mi, and so on.
The notation in the actual transcriptions for music of course contains more symbols to recognize beat, rhythm, note length, sustains, repeats, hammers, flutters, and even notation for when to breath.  
Following is a basic example of notation as well as details in red that explain the notation and symbols. (Special note: In some music it is not specified when to breath. When it is, it will be with a "v" near the notes in a gap between playing. Most likely placed at the end of a bar or section.)