The 19-year-old has agreed a new four-and-a-half-year deal after impressing with his progress this season while on loan at Twente.
He's played 29 times this season for the Dutch side, scoring two goals to help the side sit comfortably at the top of the Ereste Divisie.
They hold an 11-point gap over closest challengers Sparta as they look to return to the Eredivisie at the first time of asking after suffering relegation last season.
"Matthew was 18 when he arrived, but he plays like a very mature player," Twente's technical director Ted van Leeuwen said. "His impact has been very, very big."
Along with playing an integral part of Twente's push for promotion, Smith has also been capped five times by Wales including in the nation's recent win over Slovakia.
He first made his international debut for Wales in a friendly 0–0 tie with Mexico back in May 2018 having represented them at U-17, U-19 and U-21 level previously.
Smith was also the youngest player to be loaned out by City having joined the academy at the age of 14 from West Bromwich Albion.
Unlike Jadon Sancho and Brahim Diaz, he's now opted to remain at the club for the foreseeable future with his preference to remain in England.
"It's different in England in the Premier League, especially with the resources a lot of teams have," Smith said previously.
"In some countries they want to buy young players to play them. It is nice to stay in England and play first-team football, but it's getting a lot harder now just because the levels of the leagues are getting higher."
Wales' next international fixture is a Euro 2020 qualifier against Croatia on June 8 before another game against Hungary on June 11.
However, Smith's attention now returns to club football in the Netherlands with Twente's next match scheduled for Den Bosch on March 29.