
The 36-year-old Lin, arguably the greatest badminton player of all time, won the first game 21-19 against his fellow Chinese.
But Chen, the 2016 Rio Olympics gold medallist, came back to win the next two 21-12, 21-12 and send a wilting Lin home early.
Lin, a five-time world champion and the 2008 and 2012 Olympic champion, has now lost eight times in the first round of tournaments this year.
Once the world number one, his ranking has fallen to 18th.
Chen and Shi Yuqi are third and fourth respectively and in pole position to represent China next summer in Tokyo, as long as they remain ahead of Lin at the April 2020 cut-off.
Shi is coming back from an ankle problem and more injuries for him could be Lin's best hope for making the China team for Tokyo.
Shi, the third seed, defeated South Korea's Son Wan-Ho 21-17, 21-17.
Lin, who earned the nickname "Super Dan" during his pomp, has always said that he wanted to end his career with another tilt at Games gold.
With that prospect looking increasingly remote, Chinese media have speculated that he could announce his retirement imminently.
On Tuesday, defending Fuzhou champion Kento Momota, the world number one from Japan, defeated Daren Liew when the Malaysian retired.
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