chao vs chau
These are the kind of observations I enjoy seeing on the board regarding Spanish because it means some readers are questioning and observing the fundamentals aspects of the language. Regarding the spelling of chao vs. chau as you all know it’s a borrowed word from the Italian ciao however, the spelling in Spanish accommodates Spanish phonetics. This concept is called 'españolización'. If a foreign word is adopted officially into the Spanish language the spelling is changed to accommodate Spanish sounds of the alphabet without changes in the pronunciation of the borrowed word.
Regarding this borrowed word in question both ways of spelling it in Spanish chao and chau are accepted. Chau with [au] phonetic spelling is a regional variation of chao [ao] used in some South American countries. I am with crowd though colombianita and M.A.R that chao should be used just based on the sound that [ao] carries vs. [au]. However, you will see both written in the Spanish-speaking world.
Chao.
-LDG.