Unless you believe that his armor blocks all chakra attacks no matter how powerful, then that statement 'block all chakra' isn't suppose to be taken literally rather it's suppose to be evaluated within the context of the statement where Kidomaru is addressing his ability to defend himself against neiji's gentle fist.A smaller variant will definite be reduced by damage. All he needs to do is produce armor that can block all chakra[You must be registered for see links], when he activates his Twin Demon, then regenerate from the rest of the damage output.