Alibaba has upgraded its flagship artificial-intelligence model. It's another AI threat for software stocks, although corporate caution around using Chinese technology might limit the immediate risk.

The company on Monday unveiled Qwen 3.5, the latest update to its leading AI model. Alibaba said it is an advance in agentic AI -- versions of the technology that can take instructions and perform multistep tasks.

Notably, Alibaba has also released an open-source version of the latest model. As Barron's has written, while China's best AI generally remains several months behind the leading U.S. models, Chinese developers have gained a foothold in the market by offering open-source models that users can modify. Those are particularly useful for programming due to the ability to tailor the models for specific purposes and cost effectiveness.

Alibaba made its announcement after the close of half-day trading in Hong Kong, which was shortened due to Lunar New Year's Eve. Alibaba shares fell 0.5% in Hong Kong and weren't treading in the U.S. due to Presidents Day.

The software sector has been battered by fears about rapid advances in the ability to "vibe code" with AI, meaning developers can rapidly produce custom applications and programs that could eat into the sector's traditionally high margins.

"With Qwen3.5 as the underlying model, Qwen Code supports "vibe coding," turning natural-language instructions into code, iterating on projects in real time, and handling creative tasks such as generating videos or other assets," Alibaba's Qwen team wrote on its website Monday.

However, Qwen is likely to be less of a direct threat to U.S. software companies than Anthropic's Claude -- the AI that has rocked various sectors in recent weeks -- as American companies remain wary of giving Chinese AI access to private data.

Geopolitical concerns around Alibaba were recently highlighted when the company appeared on an updated list of companies backed by the Chinese military that was posted on Friday by the Pentagon. The update was subsequently withdrawn with no explanation.

Fears of future U.S. restrictions could limit the American adoption of Qwen 3.5, although Alibaba said it was competitive on various benchmarks with OpenAI's GPT, Google's Gemini, and Anthropic's Claude.