Barca coach Xavi Hernandez has been keen to strengthen at right-back, having previously used centre-backs Jules Koundé and Ronald Araújo in the position, and allowed Sergiño Dest to join PSV Eindhoven.
However there was some debate within the club on whether to go for an experienced player like Cancelo or a younger alternative such as Real Valladolid's Iván Fresneda, preferred by new sporting director Deco.
The club's transfer activity has been restricted by their limited finances, seeing them target free transfers -- Gundogan and Martinez -- affordable options like Romeu, and now Cancelo on loan.
The defender spent the second half of last season at Bayern Munich, after falling out of favour with City coach Pep Guardiola.
He became one of the Premier League's best full-backs -- capable of playing on either flank, or in a more advanced role -- before his relationship with Guardiola began to falter, and he was subsequently sent on loan to Bayern.