UPDATE 2-AgBank shares up as Morgan Stanley lifts stake

* AgBank HK shares up 5 pct after Morgan Stanley lifts stake

* AgBank Shanghai shares advance 3 percent

* Morgan Stanley was one of AgBank's IPO underwriters

* HK-listed shares up nearly 7 percent from IPO price

(Adds Morgan Stanley statement in para 4-6)

HONG KONG, July 23 (Reuters) - Hong Kong-listed shares of Agricultural Bank of China (1288.HK) rose over 5 percent on Friday after Morgan Stanley (MS.N) lifted its stake in the Chinese lender as part of its management of the IPO process.

Morgan Stanley raised its holding in AgBank's H-shares to 16.31 percent from 15.28 percent earlier this week, according to data on the website of the Hong Kong stock exchange.

"This has helped boost confidence among retail investors that the bigger players are interested in buying into the bank," said Jonathan Siu, an analyst at Core Pacific-Yamaichi in Hong Kong. "There was some uncertainty during the first couple of days, but this has helped improve sentiment."

Morgan Stanley said in a statement the "vast majority" of AgBank shares it held were linked to the greenshoe option and did not represent its own bets on the Chinese lender.

A greenshoe option, also known as an overallotment, allows companies to expand an offering if there is enough demand for the stock within the first month of trade.

Underwriters typically hold the shares in trust on behalf of the issuer, ultimately either releasing them to the allocated holders or returning them to the company.

The remainder of the shares that Morgan Stanley holds include holdings related to client activity, positions held separately by the firm's investment management division and positions held for its trading book, the bank said.

AgBank's Hong Kong-listed H shares closed the session up 5.45 percent at HK$3.49. The benchmark Hang Seng Index .HSI was up 1.1 percent.

AgBank's (601288.SS) Shanghai-listed A shares closed up 2.9 percent at 2.81 yuan, beating the Shanghai Composite Index's .SSCE 0.38 percent advance.

Morgan Stanley, and rivals Deutsche Bank AG (DBKGn.DE), Goldman Sachs Group Inc (GS.N), JP Morgan Chase & Co (JPM.N), Macquarie Group (MQG.AX) and China International Capital Corp (CICC), handled AgBank's Hong Kong offering that raised about $10.5 billion.

While it is common for underwriters to buy the shares of a company they helped list, only Goldman Sachs has received the mandate to stabilise AgBank shares during the first month following its offering, according to the lender's prospectus.

AgBank made modest debuts in Hong Kong and Shanghai last week, reflecting wider concern over valuations and investor cautiousness amid market volatility.

Its price of HK$3.42 midway through the Hong Kong trading day represents a near 7 percent increase from its IPO price of HK$3.20 per share. (Reporting by Kelvin Soh and Kennix Chim; Editing by Sharon Lindores)