According to the Sun, the England under-19s international looks certain to be heading for the exit doors of St Andrews' as he is coming to the end of his current contract.
And Arsenal, who have been monitoring his progress at Birmingham, look set to swoop in the summer.
However, they may have to battle with Everton, Newcastle and Tottenham as they too have been watching developments.
Gray is in high demand as Championship side Bournemouth had three bid rejected during the January, the highest being £5million.
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Arsenal are keen to sign Demarai Gray from Birmingham City
Liverpool have a clause in place that means they must be informed of any offers, the Sun says.
But with his contract situation, he could be available in the summer for as little as £3m.
The 18-year-old has scored in the last two games for City and has six to his name this term.
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