After last summer’s Chinese stock market plunge, the authorities didn’t do anything to try to address the hyped-up bubble, the overheated property market, massive toxic debt riddling the country’s closed financial system and the huge drag of China’s state-owned enterprises.

No, they simply put in place a “circuit-breaker” rule that suspends trading for the day should the stock market fall 7% from its previous close. The new measure came into force only at the start of the New Year and it’s now been triggered on its very first day of operation. That happened after the CSI 300 index dropped by the requisite 7% – the Shanghai composite lost 6.9% while the Shenzhen Composite tech index fell 8%.

Trading had earlier been suspended for 15 minutes after a 5% fall, but the markets slid further on the resumption of trading after the latest factory data showed that China’s manufacturing sector has shrunk for five months in a row.

Contagion spreads

World markets responded with falls too and as I write the FTSE 100 is down 2% on the day to 6,115. Companies exposed to China are among the FTSE’s 20 biggest fallers of the morning – Standard Chartered is down 5.2%, HSBC Holdings down 2.9%, and Burberry Group has shed 3.2%.

Mining and commodities stocks are also among the big losers with Anglo American dropping 8.3% and Glencore down 6.6%.

What should UK investors do now? Well, don’t panic. For one thing, the Chinese stock market accounts for only a relatively small portion of the country’s huge economy and with a lot of investor cash chasing such a small pool of shares, it will inevitably be more volatile as a result.

And the latest economic update really shouldn’t have come as a surprise to anyone – I think it’s inevitable that China is heading for a longer slowdown than many of us had expected. It won’t be helped by the government sticking short-term plaster on the cracks rather than looking at the required longer-term economic reform.

No panic here

As for individual shares, I’ve already suggested that HSBC and Standard Chartered could be in for a tough year in 2016 and I wouldn’t buy them myself right now. But HSBC’s prospective dividend yield has risen to 6.4%, would still be adequately covered by earnings for this year and next, and the bank has a consistent policy of maintaining (and even lifting) its dividend through both good and bad times. I reckon there are better banking bargains to be had but I wouldn’t be going for a panic sell if I owned HSBC.

For a big fashion brand, Burberry is actually on quite a modest P/E of around 16 and with dividends yielding 3% and rising. I wouldn’t buy into fashion myself as it’s too fickle, but Burberry should be fine for the long term.

And then there are even shares such as Apple Inc, with sales of iThings in Asia being behind a fair bit of its growth – but a tough year or two in China isn’t going to do any serious harm there either.

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Alan Oscroft has no position in any shares mentioned. The Motley Fool UK owns shares of and has recommended Apple. The Motley Fool UK has recommended Burberry and HSBC Holdings. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.