On-loan at Crystal Palace, Loftus-Cheek stood strong in their thrashing at City on Saturday.
Appearing as a pundit on BT Sport Score, Sherwood suggested the 21-year-old midfielder wanted to catch City boss Pep Guardiola's eye.
Sherwood explained: "I feel this kid's a Rolls-Royce, Loftus-Cheek. I think he's a real footballer.
"He gets away, strides away… I think he's putting himself in the shop window for someone like Man City. 'If Chelsea don't want me, I'll tell you what, Man City might want me'. And he's capable of playing for them.
"He gets himself and he drives at the defence and he hits a good shot. Ederson is completely beaten and it comes off the upright.
"He is a top player this kid. Last week he played his first game for Roy Hodgson and Roy brought him off after 68 minutes and got booed on the first game. This kid's a player.
"He had to go out and play, but I don't know why he has to go out and play if I'm honest. I think he's good enough to play for Chelsea Football Club, I think he is. But you're not gonna get an opportunity there so he's done the right thing.
"And if he don't [get a chance at Chelsea next season], he has a good season and maybe he goes somewhere else. He'll be looking across at Pep Guardiola and saying: 'Look, this is what I've got. Any good to ya?'"