5% SECURED CONVERTIBLE PROMISSORY NOTE

FORM OF SECOND NOTE

THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), OR APPLICABLE STATE SECURITIES LAWS. THE SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED IN THE (A) ABSENCE OF (I) A REGISTRATION STATEMENT IN EFFECT WITH RESPECT TO THE SECURITIES UNDER THE SECURITIES ACT OR (II) AN OPINION OF COUNSEL TO THE HOLDER THAT SUCH REGISTRATION IS NOT REQUIRED OR (B) UNLESS SOLD PURSUANT TO RULE 144 OR RULE 144A OF THE SECURITIES ACT.  THIS SECURITY AND THE SECURITIES ISSUABLE UPON CONVERSION OF THIS SECURITY MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN SECURED BY SUCH SECURITIES.

5% SECURED CONVERTIBLE PROMISSORY NOTE

FOR VALUE RECEIVED,  CHINA RECYCLING ENERGY CORPORATION, a Nevada corporation (hereinafter called “ Borrower ”), hereby promises to pay to CARLYLE ASIA GROWTH PARTNERS III, L.P., a limited partnership organized under the Laws of the Cayman Islands (“ CAGP ”), and CAGP III CO-INVESTMENT, L.P., a limited partnership organized under the Laws of the Cayman Islands (together with CAGP, each, a “ Holder ”) or its registered assigns or successors in interest or order, without demand, the sum of Fifteen Million U.S. Dollars (US$15,000,000) (“ Principal Amount ”), plus accrued interest thereon, on ____________, 201_ (the “ Maturity Date ”). The percentage ownership interest of each Holder in this Note is set forth in Schedule A attached hereto.   

This 5% Secured Convertible Promissory Note (“ Note ”) has been entered into pursuant to, and is subject to, a Stock and Notes Purchase Agreement dated as of November 16, 2007 by and among Borrower and the Holder, among others (the “ Purchase Agreement ”), and shall be governed by the terms of such Purchase Agreement. Unless otherwise separately defined herein, all capitalized terms used in this Note shall have the same meaning as is set forth in the Purchase Agreement.

This securities represented by this Note is also subject to a (i) Registration Rights Agreement dated as of November 16, 2007, by and between the Borrower and the Holder, and a (ii) Shareholders Agreement dated as November 16, 2007, by and among the Borrower, Holder and the shareholders of the Borrower party thereto.  This Note is secured by a security interest granted to the Holder pursuant to a Share Pledge Agreement dated as November 16, 2007 by and among the Holder and the party listed therein.

The following terms shall apply to this Note:

ARTICLE I

INTEREST

1.1

Interest Rate .  Interest on the outstanding Principal Amount shall accrue from the date of this Note and shall be payable in arrears together with, at the same time and in the same manner as payment of Principal Amount and on the Maturity Date, whether by acceleration or otherwise.  Interest on the outstanding principal balance of this Note shall accrue at 5.0% per annum (the “ Interest Rate ”).  Interest on the outstanding principal balance of the Note shall be computed on the basis of the actual number of days elapsed and a year of three hundred and sixty (360) days.  

ARTICLE II

CONVERSION RIGHTS

2.1

Conversion Right and Conversion Price .  

(a)

The Holder shall have the right, but not the obligation, to convert all or any part of the aggregate outstanding Principal Amount of this Note, together with interest, if any, into shares of Common Stock, at any time prior to the Maturity Date, subject to the terms and conditions set forth in this Article II, at a conversion price per share of Common Stock calculated as follows: (a) an amount equal to (i) the Actual Borrower Net Profit, multiplied by (ii) 8, and less (iii) the Principal Amount of this Note, together with accrued interest, divided by (b) the then total shares of Common Stock outstanding on a fully-diluted basis (for the avoidance of doubt, including securities which may be exercised, converted or exchanged for Common Stock issued under the Management Incentive Plan, but excluding the shares of the Common Stock to be issued upon conversion of this Note) (such result, the “ Conversion Price ”, as the same may be adjusted from time to time in accordance with this Note).  For purposes of this Note, “ Actual Borrower Net Profit ” shall mean an amount equal to the consolidated after-tax net profit of the Borrower and its Subsidiaries for the fiscal year ending December 31, 2008 (in U.S. Dollars), but excluding for purposes of this calculation any non-cash redemption amortization charges in respect of this Note, as shall be determined based on the audited consolidated financial statements of the Borrower for the fiscal year ending December 31, 2008, which shall be prepared by a Qualified Accounting Firm no later than three months following the end of December 31, 2008 (the “ Determination Date ”).  Such Actual Borrower Net Profit shall be calculated using the foreign exchange rate in effect as of the date of this Note.  

(b)

If the Holder exercises its right to convert at any time prior to the Determination Date, then the Conversion Price for purposes of this Note shall be calculated as follows: the Borrower and Holder shall in good faith agree upon an estimate of the Actual Borrower Net Profit (“ Estimated Borrower Net Profit ”), which amount shall be used instead of the Actual Borrower Net Profit in calculating the Conversion Price in accordance with Section 2.1(a) above (such resulting amount, the “ Estimated Conversion Price ”).  If the Borrower and the Holder are unable to agree upon the Estimated Borrower Net Profit with 15 calendar days of the Holder’s exercise of its right to convert, then the Estimated Borrower Net Profit shall be the average of the good faith estimates provided by the Borrower and the Holder.  Following the Determination Date, the Estimated Conversion Price shall be adjusted as follows: if the Actual Borrower Net Profit is less than the Estimated Final Borrower Net Profit, then as soon as reasonably practicable after the Determination Date, the Borrower shall issue to the Holder an additional amount of shares equal to the difference between (i) the number of shares that would have been issuable to the Holder had the Conversion Price been calculated based on the Actual Borrower Net Profit and (ii) the number of shares issued to the Holder based on the Estimated Conversion Price.  However, if the Actual Borrower Net Profit is greater than the Estimated Final Borrower Net Profit, then as soon as reasonably practicable after the Determination Date, the Borrower shall be entitled to redeem from the Holder, and the Holder shall remit to the Borrower for redemption, an amount of shares equal to the difference between (x) the number of shares issued to the Holder based on the Estimated Conversion Price and (y) the number of shares that would have been issuable to the Holder had the Conversion Price been calculated based on the Actual Borrower Net Profit.

(c)

The number of shares of Common Stock to be issued upon each conversion of this Note pursuant to this Article II shall be determined by dividing the then applicable Conversion Price by the Principal Amount and accrued interest to be converted.

(d)

The Holder may exercise such right by delivery to the Borrower of a written Notice of Conversion pursuant to Section 2.2.

(e)

 Upon any conversion of this Note, the number of shares of Common Stock allocable among each Holder shall be in accordance with their percentage interest set forth in Schedule A attached to this Note.  As between the Holders, any partial interest in one whole share of Common Stock held by the Holders should be allocated to the Holder with the greater partial interest such that only one Holder will be entitled to receive such whole share of Common Stock.  After giving effect to the foregoing, in lieu of the Borrower issuing any fractional shares to the Holders upon conversion of this Note, the Borrower shall make an adjustment and payment in cash to the Holders.

2.2

Mechanics of Holder’s Conversion .

(a)

In the event that the Holder elects to convert this Note into Common Stock, the Holder shall give notice of such election by delivering an executed and completed notice of conversion (a “ Notice of Conversion ”) to the Borrower, which Notice of Conversion shall provide a breakdown in reasonable detail of the Principal Amount, accrued interest and amounts being converted.  The date specified in the Notice of Conversion, or if no date is specified, then the date of the delivery of the Notice of Conversion, shall be referred to as the “ Conversion Date .”  A form of Notice of Conversion to be employed by the Holder is annexed hereto as Exhibit A .

(b)

Pursuant to the terms of the Notice of Conversion, the Borrower shall deliver, or cause to be delivered, such number of Conversion Shares as determined pursuant to this Note via, at the Holder’s election, (i) physical certificates, or (ii) electronically through the Depository Trust Borrower or other established clearing corporation performing similar functions. In the case of the exercise of the conversion rights set forth herein, the conversion privilege shall be deemed to have been exercised and the Conversion Shares issuable upon such conversion shall be deemed to have been issued upon the Conversion Date.  The Holder shall be treated for all purposes as the beneficial holder of such shares of Common Stock, unless the Holder provides the Borrower written instructions to the contrary. 

2.3

Adjustment Events .

(a)

The Conversion Price and number and kind of shares or other securities to be issued upon conversion shall be subject to adjustment from time to time upon the happening of certain events while this conversion right remains outstanding, as follows:

(i)

Merger, Sale of Assets, etc .  If (A) the Borrower effects any merger or consolidation of the Borrower with or into another entity, (B) the Borrower effects any sale of all or substantially all of its assets in one or a series of related transactions, (C) any tender offer or exchange offer (whether by the Borrower or another entity) is completed pursuant to which holders of Common Stock are permitted to tender or exchange their shares for other securities, cash or property, (D) the Borrower consummates a stock purchase agreement or other business combination (including, without limitation, a reorganization, recapitalization, spin-off or scheme of arrangement) with one or more persons or entities whereby such other persons or entities acquire more than the 50% of the outstanding shares of Common Stock (not including any shares of Common Stock held by such other persons or entities making or party to, or associated or affiliated with the other persons or entities making or party to, such stock purchase agreement or other business combination), or (E) any “person” or “group” (as these terms are used for purposes of Sections 13(d) and 14(d) of the 1934 Act) is or shall become the "beneficial owner" (as defined in Rule 13d-3 under the 1934 Act), directly or indirectly, of 50% of the aggregate Common Stock of the Borrower (in any such case, a “ Fundamental Transaction ”), this Note, as to the Principal Amount hereof and accrued interest hereon, shall thereafter be deemed to evidence the right to convert into such number and kind of shares or other securities and property as would have been issuable or distributable on account of such Fundamental Transaction, upon or with respect to the securities subject to the conversion right immediately prior to such Fundamental Transaction.  The foregoing provision shall similarly apply to successive Fundamental Transactions of a similar nature by any such successor or purchaser. Without limiting the generality of the foregoing, the anti-dilution provisions of this Section shall apply to such securities of such successor or purchaser after any such Fundamental Transaction.

(ii)

Reclassification, etc .  If the Borrower at any time shall, by reclassification or otherwise, change the Common Stock into the same or a different number of securities of any class or classes, this Note, as to the Principal Amount hereof and accrued interest hereon, shall thereafter be deemed to evidence the right to convert into an adjusted number of such securities and kind of securities as would have been issuable as the result of such change with respect to the Common Stock immediately prior to such reclassification or other change.

(iii)

Stock Splits, Combinations and Dividends .  If the shares of Common Stock are subdivided