Take it seriously.

1. This is clearly a racist remark.
2. School authority should be notified in written form. They are typically very scared of liabilities from such disputes.
3. Once the school authority is notified, you can discuss with the teacher whether you should prepare a little speech in front of the class with your kid to address the history of racial discrimination again Chinese (the Chinaman Exclusion Act, etc.), and what expressions are considered derogatory to Chinese (chinks, chinaman, etc.).