I am seeing the same thing. OutputToString() internally uses OutputToIOStream() but it sets the CharEncoding on the stream to "binary" before passing it. I think this is the source of the problem.
I was able to work around it using OutputToLibraryStream instead:
ENSEMBLE>set msg = ##class(EnsLib.EDI.XML.Document).ImportFromString("<Test>מִבְחָן</Test>")
ENSEMBLE>set stream = ##class(%Stream.TmpCharacter).%New()