CHINA RECYCLING ENERGY GROUP, INC. SHAREHOLDERS AGREEMENT November 16, 2007

CHINA RECYCLING ENERGY GROUP, INC.

SHAREHOLDERS AGREEMENT

November 16, 2007

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SHAREHOLDERS AGREEMENT

This SHAREHOLDERS AGREEMENT (this " Agreement ") is entered into as of November 16, 2007 between:

(i)    China Recycling Energy Corporation, a company incorporated and existing under the Laws of the State of Nevada (the " Company ");

(ii)   Carlyle Asia Growth Partners III, L.P., a limited partnership organized under the Laws of the Cayman Islands (" CAGP ");

(iii)  CAGP III Co-Investment, L.P., a limited partnership organized under the Laws of the Cayman Islands (together with CAGP, the " Investor ");

(iv)  Hanqiao Zheng, an individual; and

(v)  Ping Sun, an individual (each of Hanqiao Zheng and Ping Sun a " Principal Shareholder " and collectively the " Principal Shareholders ," and together with the Investor, and each shareholder of the Company who subsequently becomes a party to this Agreement, the " Shareholders ").

The Company and the Shareholders are referred to herein as " Parties " collectively and a " Party " individually.

RECITALS

WHEREAS, the Company, the Investor, Sifang and TCH, have entered into that certain Stock and Notes Purchase Agreement, dated as of November 16, 2007 (the “ Purchase Agreement ”), pursuant to which the Investor (a) has subscribed for 4,066,706 newly issued Common Shares (the “ Investor Shares ”), and (b) shall purchase a 10% Senior Secured Convertible Promissory Note in the principal amount of US$5,000,000 (the “ First Note ”) and, subsequently, a 5% Senior Secured Convertible Promissory Note in the principal amount of US$15,000,000 (the “ Second Note ” and together with the First Note, the “ Notes ”) of the Company;

WHEREAS, the Principal Shareholders have pledged to the Investor certain of the Common Shares held by them as security for the full and punctual observance and performance of the covenants and agreements contained in the Notes pursuant to that certain Share Pledge Agreement, dated as of November 16, 2007 (the “ Pledge Agreement ”), between the Principal Shareholders and the Investor;

WHEREAS, it is a condition to the Initial Closing (as defined in the Purchase Agreement) that the Parties enter into this Agreement;

WHEREAS, the Parties intend that this Agreement shall take effect subject to and immediately following the Initial Closing (the “ Effective Date ”); and

WHEREAS, the Company and the Shareholders desire to confirm their agreement regarding certain matters pertaining to the ownership, operation, management and governance of the Company and their respective rights and obligations in connection therewith.

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WITNESSETH

NOW, THEREFORE, in consideration of the premises set forth above, the mutual promises and covenants set forth herein and other good and valuable consideration, the Parties hereby agree as follows:

1.

DEFINITIONS  

1.1

Definitions .  The following terms when used in this Agreement shall have the meanings as set forth below.

“ Affiliate ” means (i) in the case of an entity, any Person who or which, directly or indirectly, through one or more intermediaries, controls or is controlled by, or is under common control with any specified Person, or (ii) in the case of an individual, such individual’s spouse, children, grandchildren or parents or a trust primarily for the benefit of any of the foregoing.

“ Agreement ” has the meaning provided in the preamble hereto.

“ Arbitration Notice ” has the meaning provided in Section 9.2(b) hereto.

“ Articles of Incorporation ” means the articles of incorporation of the Company, as amended, as in effect as of the date thereof.

“ Board ” means the board of directors of the Company.

“ Business Day ” shall mean any day that is not a Saturday, Sunday, legal holiday or other day on which commercial banks are required or authorized by law to be closed in Hong Kong, the People’s Republic of China or New York.

“ Company ” has the meaning provided in the preamble hereto.

“ Company Group ” means the Company, Sifang and THC.

“ Common Shares ” means the common shares, par value US $0.001, of the Company.

“ Contract ” means all loan agreements, deeds, letters of credit (including credit application forms and settlements of obligation relating thereto), mortgages, collateral agreements, pledge agreements, trust deeds, notes, bonds, guarantees, guarantee obligations, licenses, franchises, permissions, powers of attorney, purchase orders, leases, and other consents, agreements, certificates, certificates of indebtedness, proposals, commitments, arrangements and understandings (whether written or oral), to which such Person is a party, or which binds or affects such Person or such Person’s properties or assets (including subsequent amendments, supplements, waivers or modifications thereof).

“ control ” means, when used with respect to any Person, power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise, and “controlling” and “controlled” have meanings correlative to the foregoing.

“ Dispute ” has the meaning provided in Section 9.2(a) hereto.

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“ Effective Date ” has the meaning provided in the recitals hereto.

“ Exchange Act ” shall mean the U.S. Securities and Exchange Act of 1934 and the rules and regulations promulgated thereunder, as amended from time to time.

“ Exchange ” means the National Association of Securities Dealers Automated Quotations mainboard, the New York Stock Exchange or the American Stock Exchange.

“ Exchange Listing ” means the a listing of the Common Stock on an Exchange in accordance with Section 6.8 .

“ First Note ” has the meaning set forth in the recitals hereto.

“ Fully Diluted Percentage Ownership ” means, with respect to any holder of Securities, a percentage represented by the fraction, (a) the numerator of which is the the number of shares of Common Stock then held by such holder (after giving effect to the number of shares of Common Stock that such holder would hold upon the conversion or exercise of all Securities held by such holder), and (b) the denominator of which is the Number of Shares of Common Stock on a Fully Diluted Basis. For the purposes of the determination of the Fully Diluted Percentage Ownership of any Shareholder, Shareholders that are Affiliates to each other and Shareholders that are funds and have a common investment manager may, in each case, aggregate the number of shares held by them.

“ GAAP ” means generally accepted accounting principles in the United States, applied on a consistent basis.

“ Governmental Approval ” means any consent, approval, permission, waiver of right, authorization, acceptance, franchise, business permission, agreement, license, certificate, exemption, order, registration, affidavit, filing, report or notice made by any Governmental Authority, or between Governmental Authorities, or to any Governmental Authority.

“ Governmental Authority ” means any country or government, or international organization with which more than one country or government is affiliated, or any state or local government, authority, ministry or sub-organization thereof.

“ HKIAC ” has the meaning provided in Section 9.2(c) hereto.

“ Indebtedness ” shall mean (i) indebtedness for borrowed money, including indebtedness evidenced by a note, bond, debenture or similar instrument, and any guarantees, endorsements or keep-well obligations or other contingent obligations in respect thereof, (ii) obligations to pay rent or other amounts under any lease of real or personal property, or a combination thereof, which obligations are required to be classified and accounted for as capital leases on a balance sheet under GAAP, but excluding leases of capital equipment entered into in the ordinary course of business not deemed material under GAAP in the applicable Person’s financial statements, in each case consistent with past practice, or (iii) obligations in respect of outstanding letters of credit, acceptances and similar obligations created for the account of such Person.

“ Indemnifiable Loss ” means, with respect to any Person, any action, cost, damage, disbursement, expense, liability, loss, deficiency, diminution in value, obligation, penalty or settlement of any kind or nature.  Notwithstanding anything to the contrary provided in the preceding sentence, “ Indemnifiable Loss ” shall include, but shall not be limited to, (i) interest or other carrying costs, penalties, legal, accounting and other professional fees and expenses incurred in the investigation, collection, prosecution and defense of claims and amounts paid in settlement, that may be imposed on or otherwise incurred or suffered by such Person and (ii) any taxes that may be payable by such Person by reason of the indemnification of any Indemnifiable Loss hereunder, other than taxes that would have been payable notwithstanding the event giving rise to indemnification.

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“ Initial Closing ” has the meaning assigned to such term in the Purchase Agreement.

“ Intellectual Property ” has the meaning assigned to such term in the Purchase Agreement.

“ Investor ” has the meaning provided in the preamble hereto.

“ Investor Directors ” has the meaning provided in Section 4.1(b) hereto.

“ Investor Refusal Period ” has the meaning provided in Section 5.2 hereto.

“ Investor Shares ” has the meaning set forth in the recitals hereto.

“ Key Employee ” means, with respect to any Person, the president, chief executive officer, the chief financial officer, the chief operating officer, the chief technical officer, the chief sales and marketing officer, the general manager, any other manager with the title of “vice-president” or higher, or any other employee with responsibilities similar to any of the foregoing, of such Person.  For purposes of this Agreement, “Key Employee” includes any current Key Employee of Yingfeng who will be executing an employment agreement with TCH as contemplated by the Purchase Agreement.

“ Law ” means (a) any constitution, treaty, statute, law (including, where applicable, common law), Governmental Authority ordinance, ministry ordinance and any other regulation, (b) any Governmental Approval, and (c) any order, decision, adjudication, decision on appeal, judgment and any other binding decision by any Governmental Authority, or agreement with any Governmental Authority.

“ Lien ” means any mortgage, pledge, claim, security interest, encumbrance, title defect, lien, charge or other restriction or limitation.

“ Management Incentive Plan ” has the meaning assigned to such term in the Purchase Agreement.

“ Material Adverse Effect ” means, in connection with a Person, a material adverse effect on the general condition, business operations, financial conditions (whether present or future), assets or liabilities, capital stock, business results or prospects of such Person.

“ Notes ” has the meaning set forth in the recitals hereto.

“ Number of Shares of Common Stock on a Fully Diluted Basis ” means the aggregate of the number of (i) issued shares of Common Shares at the relevant time, and (ii) if any Securities convertible into shares of Common Shares are issued, or any Securities the holder of which is entitled to exercise any acquisition right for shares of Common Shares are issued, the number of shares of Common Shares to be issued or acquired when such Securities are converted or exercised on the then-effective terms and conditions.

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“ Organizational Documents ” of a Person means, as applicable, such Person’s certificate or articles of incorporation, by-laws or regulations of its board of directors, regulations of the board of statutory auditors, regulations of stock handling, commercial register, all minutes with respect to board and general shareholders’ meetings, and other organizational documents.

“ Parties ” has the meaning provided in the preamble hereto.

“ Permits ” has the meaning assigned to such term in the Purchase Agreement.

“ Person ” means any natural person, enterprise, partnership, non-corporate entity, corporate entity, corporation, trust, business trust, a Governmental Authority or other organization.

“ Pledge Agreement ” has the meaning set forth in the recitals hereto.

“ Proposed Transfer ” has the meaning provided in Section 5.2 hereto.

“ Proposed Transferee ” has the meaning provided in Section 5.2 hereto.

“ Principal Shareholder ” has the meaning provided in the preamble hereto.

“ Purchase Agreement ” has the meaning set forth in the recitals hereto.

“ Qualified Accounting Firm ” has the meaning provided in Section 6.9 hereto.

“ Registration Rights Agreement ” means the Registration Rights Agreement entered into as of the date hereof between the Company and the Investor.

“ Relevant Shares ” has the meaning provided in Section 5.2 hereto.

“ Rights Issuance Entitlement ” has the meaning provided in Section 3.1 hereto.

“ Rights Offering Notice ” has the meaning provided in Section 3.2 hereto.

“ Sale Notice ” has the meaning provided in Section 5.2 hereto.

“ Sale Price ” has the meaning provided in Section 5.2 hereto.

“ Second Note ” has the meaning set forth in the recitals hereto.

“ Securities ” means any Common Shares and any securities which are convertible into any Common Shares or any option or right to subscribe for or acquire any Common Shares.

“ Securities Act ” means the U.S. Securities Act of 1933, as amended and interpreted from time to time.

“ Selling Shareholder ” has the meaning provided in Section 5.2 hereto.

“ Shareholders ” has the meaning set forth in the preamble hereto.

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“ Sifang ” means Sifang Holdings Co., Ltd., a company organized under the Laws of the Cayman Islands.

“ TCH ” means Shanghai TCH Energy Technology Co., Ltd., a wholly-foreign-owned enterprise organized under the Laws of the People’s Republic of China.

“ Transaction Documents ” means this Agreement, the Purchase Agreement, the  Registration Rights Agreement and the Pledge Agreement, and each of the agreements and other documents otherwise required in connection with implementing the transactions contemplated by any of the foregoing.

“ Transfer ” has the meaning provided in Section 5.1 hereto.

“ Yingfeng ” means Xi’an Yingfeng Science and Techology Co., Ltd.

1.2

Interpretations .  For all purposes of this Agreement, except as otherwise expressly provided, (i) the terms defined in Section 1.1 shall have the meanings assigned to them in Section 1.1 and include the plural as well as the singular, (ii) all accounting terms not otherwise defined herein have the meanings assigned under generally accepted accounting principles in the United States, (iii) all references in this Agreement to designated “Sections” and other subdivisions are to the designated Sections and other subdivisions of the body of this Agreement, (iv) pronouns of either gender or neuter shall include, as appropriate, the other pronoun forms, (v) the words “herein,” “hereof” and “hereunder” and other words of similar import refer to this Agreement as a whole and not to any particular Section or other subdivision, (vi) all references in this Agreement to designated Schedules, Exhibits and Annexes are to the Schedules, Exhibits and Annexes attached to this Agreement unless explicitly stated otherwise, (vii) “or” is not exclusive, (viii) the term “including” will be deemed to be followed by “, but not limited to,” and (ix) the terms “shall,” “will,” and “agrees” are mandatory, and the term “may” is permissive.

2.

REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE COMPANY AND PRINCIPAL SHAREHOLDERS

Each of the Company and the Principal Shareholders represents and warrants as of the date of this Agreement, to the Investor, as follows:

2.1

Authorization and Binding Effect .  The Company is duly incorporated and validly existing under the laws of the State of Nevada and has full power and authority under all of its applicable Organizational Documents and applicable Law to execute and deliver this Agreement, to perform its obligations hereunder and to consummate the transactions contemplated hereby. The execution and delivery of this Agreement by the Company and each of the Principal Shareholders, the performance by each of such Persons of its or their obligations hereunder, and the consummation by each of such Persons of the transactions contemplated hereby have been or will be, prior to the Initial Closing, duly authorized by all requisite action, corporate or otherwise, by such Person. Each of the Company and the Principal Shareholders has duly executed and delivered this Agreement, and this Agreement constitutes the legal, valid and binding agreement of the Company and each of the Principal Shareholders enforceable in accordance with its terms.

2.2

No Conflicts .  The execution and delivery of this Agreement, the performance of obligations under this Agreement and the performance of the transactions contemplated by this Agreement, in each case by the Company and each Principal Shareholder, shall not cause, or with notice or the lapse of time or both cause, any of the following:

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(a)

a breach, a contravention or a violation of any provision of any applicable Organizational Document of the Company or provisions of any applicable Law;

(b)

the Company or any Principal Shareholder being obliged to make any payment to or perform any other obligation for a third party (excluding obligations arising due to its obligations under this Agreement or transactions contemplated by this Agreement); or

(c)

a breach of any provision of any Contract by which the Company or any Principal Shareholder is bound, or an event of default under any such Contract or any entitlement on the part of any party to any such Contract to (i) declare any breach of such Contract, (ii) accelerate performance of any obligation under such Contract, or (iii) cancel, terminate or amend such Contract (provided, however, that any such breach or event of default not causing a material adverse effect to the Company or the rights and obligations of the Investor shall be excluded).

2.3

Ownership .  As of the date hereof, the Common Shares held by each of the Principal Shareholders as set forth on Exhibit A represent such Principal Shareholder’s entire equity ownership position in the Company and such Principal Shareholder has acquired and made full payment for all Common Shares held by such Principal Shareholder and owns such Common Shares free and clear of any Liens (other than the Security Interests (as defined in the Pledge Agreement)).

2.4

No Governmental Approval .  No Governmental Approval or third-party approval is required for the execution and delivery of this Agreement by the Company or any Principal Shareholder, the performance by any such Person of such Person’s obligations under this Agreement, and the performance of the transactions contemplated by this Agreement.

3.

PREEMPTIVE RIGHTS

3.1

Preemptive Rights .  If the Company is planning to issue or grant any Securities (it being understood that such issuance in this Section 3 is subject to Section 6.1 and includes any transfer of treasury shares), the Investor shall have the right (and not any obligation) to purchase from the Company such number (its “ Rights Issuance Entitlement ”) of relevant Securities as would maintain its Fully Diluted Percentage Ownership as of the date of the Rights Offering Notice at a price and on terms and conditions at least as, if not more, favorable than those offered to any other party.

3.2

Issuance of Securities .  If the Company is planning to issue or grant any Securities, it shall give prior written notice to the Investor specifying its intention to issue such Securities (such notice to specify the type, price, timing of issuance or grant, and other terms and conditions of the Securities to be issued or granted by the Company) (the “ Rights Offering Notice ”). The Investor may elect to exercise all or any portion of its Rights Issuance Entitlement by giving the Company written notice specifying the type and number of Securities it intends to purchase (up to its Rights Issuance Entitlement) within thirty (30) days after the date of receipt of the Rights Offering Notice from the Company, and the Company shall not issue or grant, or execute any agreement to issue or grant, the relevant Securities during such thirty-day period. If the Investor has not exercised its right under Section 3 of this Agreement within such thirty-day period, the Company shall be entitled to issue or grant the Securities specified in the relevant Rights Offering Notice with respect to which such right as was not exercised at a price and on terms and conditions no more favorable to the subscriber or purchaser than those specified in the relevant Rights Offering Notice, within ninety (90) days after the expiry of the thirty-day period. Any non-exercise of the right under Section 3 of this Agreement by the Investor on any issuance or grant shall not adversely affect the rights of the Investor to purchase any Securities issued or granted thereafter.  

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3.3

Assignability of Rights .  The rights under this Section 3 are not separately assignable from the Securities.  

3.4

Exceptions .  This Section 3 shall not apply to the following issuances and grants by the Company:

(a)

the issuance of Common Shares upon the conversion of any Securities (including the Notes);

(b)

the issuance or grant of Securities pursuant to the Management Incentive Plan;

(c)

the issuance of Common Shares as part of any stock split; and

(d)

the issuance of any Securities at the time of a merger, spin-off, share exchange or other reorganization.

4.

CORPORATE GOVERNANCE

4.1

Board of Directors .  For so long as any Investor or any of its Affiliates owns any of the Investor Shares or any of the principal amount of the Notes remains outstanding, each Shareholder shall vote (or shall cause to be voted) all the Securities owned or controlled by such Shareholder (including any Securities hereafter acquired), at any regular or special meeting of shareholders of the Company, shall take all action by written consent in lieu of such meeting of shareholders (to the extent permitted by applicable Law to effect the terms hereof), shall cause the Board nominated by it, as applicable, to vote to effect the terms hereof, and, without limiting the foregoing, shall take all other actions necessary to ensure at all times that:

(a)

the Board of Directors shall not exceed seven (7) members;

(b)

there shall be elected as members of the Board:

(1)

up to two (2) directors nominated by the Investor (each, an “ Investor Director ” and collectively the “ Investor Directors ”), upon written notice to the Company informing the Company of the Investor’s election to nominate directors to the Board in accordance with this Section 4.1 ;

(2)

one (1) individual with relevant experience in the industry pertinent to the Company’s business who is not an employee of the Company and who is acceptable to the other directors on the Board, designated by the mutual agreement of the Investor and the Principal Shareholders; and

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(c)

The Company shall take all necessary action, from time to time and at all times, so as to maintain the total size of the Board (including vacancies) to permit the Investor Director(s) to be appointed to the Board pursuant to clause (B) of this Section 4.1 .

The remaining directors of the Company shall be nominated and elected by the shareholders of the Company in accordance with the Company’s bylaws and articles of incorporation then in effect.  Notwithstanding the foregoing, to the extent that the application of the clauses (a) and (b) of this Section 4.1 shall result in the election of fewer than seven (7) directors, the size of the Board shall be reduced accordingly. The Company shall pay the reasonable expenses incurred by the Investor Director(s) to attend meetings of the Board.

4.2

D&O Insurance .  Upon written notice of Investor’s election to nominate the Investor Directors, the Company shall purchase directors and officers insurance covering all of the directors and officers of the Company, in form and substance reasonably acceptable to the Investor, if no such directors and officers insurance exists as of the date of such written notice.

4.3

Dismissals; Vacancies .  The Investor Director(s) may not be removed or replaced except by the Investor. The Investor shall be entitled to nominate a person to fill any vacancy created in the position of the Investor Director(s) (whether that vacancy is created by the death, resignation, or removal of such person, the termination of such director’s term or otherwise).

4.4

Failure to Designate a Board Member .  In the absence of any designation from the persons or groups with the right to designate a director as specified above, the director previously designated by them and then serving shall be reelected if still eligible to serve as provided herein.

4.5

Board Proceedings, Quorum .  Regular meetings of the Board shall take place at least once in each semi-annual period. For so long as the Investor or any of its Affiliates holds any of the Investor Shares or so long as all or any of the principal amount of the Notes remains outstanding, quorum for a meeting of the Board shall be a majority of directors and shall include, in each case, the attendance of the Investor Director(s), if applicable.

4.6

Meetings Via Teleconference .  Members of the Board or any committee thereof may participate in a meeting of the Board or such committee by means of a teleconference or similar communications equipment by means of which all persons participating in the meeting can hear each other, and participation in a meeting by such means shall constitute presence in person at the meeting.

4.7

No Liability for Election of Recommended Directors .  No Party, nor any Affiliate of any such Party, shall have any liability as a result of designating a person for election as a director for any act or omission by such designated person in his or her capacity as a director of the Company, nor shall any Party have any liability as a result of voting for any such designee in accordance with the provisions of this Agreement.

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4.8

General Meeting of Shareholders .  The general meeting of shareholders shall convene on a regular basis, but in any event not less frequently than once every year, to review matters relating to the operation of the Company, to take such actions as are reserved for approval by the shareholders of the Company pursuant to the provisions of this Agreement, the Articles of Incorporation and the Companies Act, and to review such other matters as the shareholders of the Company may deem appropriate. A general meeting of shareholders may be convened only upon at least two (2) weeks’ notice to the shareholders of such meeting and the purposes thereof, unless such prior notice period is waived or shortened by unanimous written consent of the shareholders. No general meeting of shareholders shall be held unless the holders of at least a majority of the issued and outstanding Securities entitled to vote attend such meeting (whether in person or by proxy). Except as required by the Nevada General Corporation Law, and subject to Section 6.1 , all resolutions of the shareholders shall require the affirmative vote of the holders of a majority of the issued and outstanding Securities entitled to vote on such resolution, represented at a meeting at which shareholders representing a majority of the issued and outstanding Securities entitled to vote are present.

4.9

Written Consents .  Any action required or permitted to be taken at any meeting of the shareholders or Board may be taken without a meeting if all shareholders or members of the Board, as applicable, consent thereto in writing, to the extent permitted by applicable Law.

5.

RESTRICTION ON SALE AND PURCHASE OF SHARES

5.1

Transfers Generally .  

(a)

The Principal Shareholders shall not, directly or indirectly, sell, assign, transfer or otherwise dispose of, or pledge, hypothecate or otherwise encumber (in each case, a “ Transfer ”), any of their Securities unless such Transfer shall have been previously approved by the express written consent of the Investor. Any purported Transfer or other disposition in violation of this Agreement shall be void.  The restrictions on Transfer contained in this Section 5 are in addition to a