China notched an economic milestone Monday, with the International Monetary Fund adding the yuan to its elite basket of reserve currencies, a move designed to spur greater liberalization in the world’s No. 2 economy.

The decision—effective next October—confers international status on China’s currency as the government starts to ease restrictions on its rigidly controlled exchange-rate and financial system. It also marks the start of a potentially more perilous course for China. A more freely traded yuan and open markets, down...