City had been hopeful of agreeing a new deal with Matondo despite rival interest from a number of clubs, including several from the Bundesliga.
But it now appears that the youngster will be moving to the Veltins Arena this month, with his City contract expiring at the end of the season.
The Premier League champions were in the same situation with Brahim Diaz, who elected to move to Real Madrid for an initial £16.5m, possibly rising to £22.5m, rather than extending his stay at the Etihad Stadium.
Those two moves come around 18 months after Jadon Sancho signed for Borussia Dortmund over concerns that he would not play enough first-team football.
Phil Foden remains the City academy's brightest hope and the midfielder has played more minutes for City this season than any other 18-year-old in the Premier League.
And while many City youngsters have felt the need to go elsewhere, the club will have made close to £150m on the sale of young players in the past two seasons should Matondo sign for Schalke.
"Yeah i have some comments," Guardiola said when asked about Matondo. "They are interested in another young player. I know how good he is, incredibly fast winger, and a young talent. This club is working so good."
City have raised £137m ($180m) on 13 young player sales since the summer of 2017, with Leicester City paying the highest individual fee when they brought in Kelechi Iheanacho for £25m ($33m).
The Blues sold young goalkeeper Angus Gunn to Southampton for £13.5m in the summer, with Turkish forward Enes Unal joining Valencia for £12.7m the year before, and Rony Lopes, Jason Denayer, Pablo Maffeo and Karim Rekik fetching between £7m and £10m each.
City recouped good fees for Angelino (£5.6m), Oliver Ntcham (£5.5m), Seko Fofana (£4.2m) and Bersant Celina (£3.8m), and the club are proud that so many of their young prospects are forging career for themselves elsewhere.
On the back of Sancho's move to Dortmund, however, City have moved to guard against their most talented players ending up in the hands of rivals Manchester United.
Brahim's move to Real Madrid includes a clause which entitles them to receive 15 per cent of any future transfer fee, but if he were to move to Old Trafford they would receive 40%.