Xiao Yu emerges as a central character within the "Love in Shanghai" narrative, unfolding in Shanghai from the late 1990s to the present. Growing up in the same shikumen neighborhood, she forms a deep childhood bond with Li Mo. Their connection intensifies after an injury prevents her from returning home, compelling Li Mo to carry her to her apartment. Unable to attend school due to her injury, Xiao Yu asks Li Mo to record his classroom lessons onto cassette tapes for her. This exchange of cassette recordings becomes their primary communication, gradually fostering mutual understanding and blossoming into romance.

Xiao Yu later confides in Li Mo about her family's plan for her to apply to an elite high school far away, requiring her relocation. This news provokes Li Mo's anger, spurring him to apply to the same school despite the significant academic disparity between them. Through relentless effort, Li Mo secures acceptance. However, arriving at Xiao Yu's apartment to share the news, he discovers her hospitalization. Her father had physically punished her after she deliberately failed the entrance examination—a sacrifice made to stay in Shanghai and preserve her relationship with Li Mo. Before Li Mo can visit her in the hospital, his own family relocates near the new high school, forcing an abrupt separation.

Years later as adults, Li Mo learns Xiao Yu departed to study abroad in the United States. Sorting through old belongings, he rediscovers one of their cassette tapes. Locating a recorder, he listens to her message revealing her intentional exam failure as an act of sacrifice to remain with him. This revelation prompts profound reflection on their past and the consequences of their choices. Sometime afterward, Xiao Yu returns to Shanghai and seeks out Li Mo at his newly renovated shikumen motel. Their reunion culminates in a silent acknowledgment and a shared smile at the front door.