During the Second Sino-Japanese War, Xu and her second husband, Lieutenant General Tang Shengming, ostensibly served under the Japanese-controlled Nanking puppet regime, but secretly worked as agents for the Republic of China resistance based in Chongqing.

With the Communist victory in the Chinese Civil War, Xu and Tang defected to the People's Republic of China but were severely persecuted during the Cultural Revolution (1966–1976).

She became famous after starring in the 1933 silent film Remnants of Spring (残春), in which she appeared in probably the earliest female bath scene in the history of Chinese cinema.

[4] Tang was a notorious playboy and a close friend of Dai Li, chief of the Bureau of Investigation and Statistics (Juntong), the secret service of the Republic of China.

[9] Xu's assistant Zhang Suzhen (张素贞), a Juntong secret agent, became Tang's concubine, and Shanghai tabloids often reported salacious stories of the three sharing the same bed.

[1] Tang was appointed the commander of public security of Jiangsu province,[9]: 390  while Xu was his socialite wife who became a close friend with the wives of Wang Jingwei, Chen Gongbo, and Zhou Fohai, the top leaders of the puppet regime.

[1] After the surrender of Japan at the end of World War II, the Kuomintang government revealed that Tang Shengming and Xu Lai had been sent by Dai Li to serve as secret agents in the Wang Jingwei regime.

Xu Lai reportedly discovered the identity of a Japanese spy while playing mahjong with Zhou Fohai's wife, and personally delivered messages to Chinese agents in Shanghai in urgent situations.

[1] When the Cultural Revolution started in 1966, Mao's wife Jiang Qing, who had been a minor actress in Shanghai during the 1930s, began persecuting many of her former colleagues who were familiar with her "bourgeois" past.