Works for me. Remember UTF-16 is similar to UNICODE.

Please note the N string-prefix.

declare @xml xml

set @xml =

N'<?xml version="1.0" encoding="utf-16"?>

<root>

<names>

<name>test</name>

</names>

<names>

<name>test1</name>

</names>

</root>

'

SELECT

x.value('name[1]', 'varchar(10)') as Name

FROM

@xml.nodes('/root/names') t(x)