By Davide Barbuscia

NEW YORK (Reuters) -Deflationary pressures in China could spill over into global markets, which is potentially near-term good news for Western central banks as they seek to curb inflation, U.S. asset manager PIMCO said on Wednesday.

China's consumer sector fell into deflation and factory-gate prices extended declines in July, as the world's second-largest economy struggled to revive demand and a flurry of policies to support the economy failed to shore up activity.

The economic deterioration could moderate inflation in China and, increasingly, also in the markets served by Chinese goods, PIMCO Economist and Managing Director Tiffany Wilding said in a note.

"Persistent deflation in China would likely spill over to developed markets, as a weaker yuan and an elevated inventory-to-sales ratios lower the cost of Chinese goods abroad – a development central bankers in developed markets would likely welcome," she said.

“Given the usual lags, deflationary spillovers have likely only just begun to impact global consumer markets, with discounting likely to accelerate over the coming quarters.”

The Chinese central bank cut key policy rates on Tuesday for the second time in three months to boost the economy, but investors have so far been unimpressed.

Oxford Economics said in a note on Wednesday that it had reduced its 2023 gross domestic product growth forecast for China to a below-consensus 5.1%.

"Deflation, weakening trade, collapsing loan demand, and a paralysed property sector dampen our risk appetite," it said.

On Wednesday, data showed China's new home prices fell for the first time this year in July, as policy support failed to shore up the embattled property sector.

Meanwhile, a senior official told investors that Zhongrong International Trust Co., a leading Chinese trust firm, had missed repayments on dozens of investment products since late last month, adding to fears the country's property crisis would have a wider impact in the financial sector.

"For China, the risk of more pronounced deflationary pressure depends crucially on the government’s policies in the coming months," said Wilding.

"Adequate fiscal stimulus to boost domestic demand may reaccelerate inflation, while delayed or inadequate policy measures could lead to a downward spiral," she said.

(Reporting by Davide BarbusciaEditing by Mark Potter)