Cancelo spent last season on loan with Barca in a deal which did not include a purchase clause and was the subject of a goodbye message by the Catalan outfit which was swiftly deleted when fans began fearing Cancelo would not return this coming year.
According to SPORT, Barca and City remain in talks over Cancelo's future and the Premier League champions have been forced to soften their stance to facilitate a summer exit for the full-back.
Cancelo is said to have rejected offers from elsewhere, including Juventus, and has informed City that he is only interested in joining Barcelona.
City had been demanding a permanent transfer this summer but have now accepted that they may have to agree to another initial loan to send Cancelo back to Spain.
Cancelo wants to rejoin Barcelona
A mandatory purchase clause was City's next demand but Barcelona have not yet shown a willingness to agree to such a term.
Barca would rather include a purchase option but could be swayed into an obligation if it was tied to Cancelo's performances next season.
Much will depend on Barca's ability to get back to La Liga's 1:1 spending rule - the ability to spend €1 for every €1 raised. Currently, their well-documented financial issues permit them only to spend €1 per €4 brought in.
If Barca can reach that level, which is not expected to be a problem later in the window, they are likely to shake hands on a deal which could value Cancelo at around €25m (£21.5m).
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