Any ideas?
Sorry, nothing else than that. Perhaps there are some phone specific security options blocking the use of SMS by applications. Try going through the Android settings, and look if you can find something that could be the culprit. Or perhaps there is some Xiaomi-specific safety application (like an anti-malware software) installed on your phone that blocks the SMS. Try asking on Xiaomi forums if it is not a known problem.
I have the same problem with replying to incoming notifications. I tried using a different smartphone or resetting it, reconnecting the fenix 5 and nothing worked. It used to work about 3 months ago and I haven't changed any phone or watch settings. Did anyone find a solution for the problem?
This article may answer your questions:
What Options Do I Have to Interact with Notifications on a Garmin Watch? | Garmin Customer Support