This week's book giveaway is in the OO, Patterns, UML and Refactoring forum. We're giving away four copies of Refactoring for Software Design Smells: Managing Technical Debt and have Girish Suryanarayana, Ganesh Samarthyam & Tushar Sharma on-line! See this thread for details.
First, an object is created for the string literal "xyz", which acts as a reference to the String object. Then that reference "xyz" is passed to the String constructor, which is called with the new operator, thus creating a second object.
Put another way, "xyz" refers to an object, and new String("xyz") refers to another object.