IMF's Lagarde says inclusion of China's yuan in SDR basket question of when

"It's not a question of if, it's a question of when," she said during a question and answer session following a speech at Fudan University.

"There's a still a lot of work to be done and everyone knows that," she added.

Her comments follow speculation that the IMF may decide to include the yuan in the SDR basket - currently made up of dollars, yen, pounds and euros - during a five-year review due to be conducted this year.

A U.S. Treasury spokeswoman said it was too early to comment on the review of the SDR currency basket.

The yuan's inclusion could be seen as diminishing the dollar's standing internationally.

The first step in the review of the basket for the SDR, an international reserve asset, is an informal board meeting in May, followed by a formal review in the autumn. Any changes would come into effect in January 2016, but would require a 70 or 85 percent majority on the IMF council.

Though Beijing keeps a tight rein on the yuan's movements and maintains strong capital controls, it is pushing for the increased use of the yuan for trade and investment as part of a long-term strategic goal to reduce dependence on the dollar.

In her speech, Lagarde also said China's biggest current challenge is escaping the "middle-income trap" - a term which refers to the large number of developing economies that experienced heady periods of investment and export-driven growth based on cheap labor only to see their economies flatten out as their cost advantages shrink.

Only a few countries like Taiwan and South Korea are considered to have successfully made the transition in recent decades.

Lagarde called for slower, higher quality growth in China.

"By brewing its economic cup of tea more slowly, China will end up with a richer taste," she said.

China's economic growth slowed to just 7.4 percent last year, the slowest in 24 years, and the IMF estimates it will slow further to just 6.8 percent in 2015. That is below the Chinese government's official target of 7.0 percent.

(Reporting By Nathaniel Taplin and Pete Sweeney; Additional reporting by Jason Lange in Washington; Editing by Simon Cameron-Moore and Chizu Nomiyama)