"Bayern certainly has Xhaka on the radar," said Hitzfeld. "Xhaka is always a topic for current top clubs, and his development is not yet complete."
The player joined the Gunners from Borussia Monchengladbach for £30 million in 2016, but he has failed to live up to the hype after sensational form in Germany.
The central talent has started 16 Premier League games since his switch but has seen two red cards in his brief career at the Emirates Stadium, according to WhoScored.com.
Squawka Football highlighted the player's questionable record:
Hitzfeld has previously dubbed the player a "young [Bastian] Schweinsteiger," comparing his attributes to the Bayern and Germany legend, per the Telegraph. That article revealed it was Xhaka's dream to play in the Premier League before moving to north London, so a return to his former league might not appeal to him.
In other Gunners news, manager Arsene Wenger will battle Chelsea coach Antonio Conte for the services of Manchester United prodigy Jesse Lingard, as the London giants attempt to recruit the hard-working attacker.
Mike McGrath of The Sun reported Arsenal want to sign the England man, who netted as the Red Devils won the EFL Cup at Wembley Stadium.
Lingard's versatility makes him an asset, able to play as a wing-back or across the midfield.
According to McGrath, Chelsea are "keen" to swoop for Lingard, who remains on the fringes of the United first team—but his development has been clear to see over the past 12 months.
The potential departure of Xhaka would be a stinging blow to Wenger, but the player has not delivered in his opening season in England.
The midfielder has proved to be a combative warrior on the pitch, but he has not solidified a starting berth with his current form.