SHAREHOLDERS AGREEMENT

SHAREHOLDERS AGREEMENT

THIS AGREEMENT (this “ Agreement ”) is dated as of August 20, 2008 by and among China New Energy Group Company, a Delaware corporation (the “ Company ”), Quick Rise Investments Limited, Waterpower Investments Limited and Eternal International Holding Group Limited (each, an “Existing Shareholder” and collectively, the “Existing Shareholders”), and China Hand Fund I, LLC, a Delaware limited liability company (“China Hand”, together with Existing Shareholders, each a “Shareholder” and collectively, the “Shareholders”). Capitalized terms used herein without definition shall have the meanings assigned to such terms in the Purchase Agreement.

WHEREAS, the Company entered into a Series A Convertible Preferred Stock Securities Purchase Agreement dated August 8, 2008 with China Hand (the “ Purchase Agreement ”), pursuant to which the Company will issue 1,672,741 shares of its Series A Convertible Preferred Stock, par value $.001 per share (“ Series A Stock ”) and warrants to purchase an aggregate of 334,548 shares of the Company’s Common Stock, par value $.001 per share (“ Common Stock ”) for an aggregate purchase price of $9,000,000 (the transactions contemplated by the Purchase Agreement, the “ Financing Transaction ”).

WHEREAS, to induce China Hand to invest in the Financing Transaction and as a condition to the Shareholders’ respective obligations to close the Financing Transaction, each Shareholder has agreed not to sell any shares of Common Stock, Series A Stock or any shares of Common Stock issuable upon conversion of the Series A Stock or the exercise of the Warrants, as applicable, that such Shareholder presently owns or may hereafter acquire, except in accordance with the terms and conditions set forth herein (collectively, the “ Shares ”).

NOW, THEREFORE, in consideration of the covenants and conditions hereinafter contained, the parties hereto agree as follows:

1.   Effectiveness of Agreement . This Agreement shall become null and void if the Purchase Agreement is terminated prior to the closing of such agreement. Each Shareholder has independently evaluated the merits of its decision to enter into and deliver this Agreement, and such Shareholder confirms that it has not relied on the advice of the Company or any other person.

2.   Beneficial Ownership . Each Shareholder hereby represents and warrants that it does not beneficially own (as determined in accordance with Section 13(d) of the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder) any Shares, or any economic interest therein or derivative therefrom, other than those Shares specified on its signature page to this Agreement.

3.   Restriction on Transfer by Existing Shareholders; Term . Each Existing Shareholder hereby agrees that such Existing Shareholder will not offer, sell, contract to sell, assign, transfer, hypothecate, pledge or grant a security interest in, or otherwise dispose of, or enter into any transaction which is designed to, or might reasonably be expected to, result in the disposition of (whether by actual disposition or effective economic disposition due to cash settlement or otherwise, directly or indirectly (each, a “ Transfer ”), any of the Shares owned by such Existing Shareholder at any time for the period commencing on the Closing Date and expiring on the date that is twelve (12) months following the Effective Date of the Registration Statement resulting in 100% of all the Registrable Securities (as defined in the Registration Rights Agreement) being registered for resale (the “ Effective Date ”) (plus one additional day for each Trading Day following the Effective Date of any Registration Statement during which either (1) the Registration Statement is not effective or (2) the prospectus forming a portion of the Registration Statement is not available for the resale of all Registrable Securities (as defined in the Registration Rights Agreement); provided, however, that in no event will such restriction on Transfer continue beyond one year following the date that China Hand is able to sell all of the Shares held by it without restriction pursuant to Rule 144 under the Securities Act (the “ Existing Shareholder Restrictive Period ”). Notwithstanding the foregoing, the Existing Shareholders shall be permitted to make Transfers to Affiliates (as defined below), so long as any such Affiliate agrees in writing to be bound by the terms of this Agreement to the same extent that the Existing Shareholder is bound.

4.   Restriction on Transfer by China Hand; Term . Except as permitted under the Transaction Documents, China Hand hereby agrees that it will not Transfer more than an aggregate of 50% of its Shares (calculated as of the Closing Date) for the period commencing on the Closing Date and expiring on the date that is twelve (12) months following the Closing Date (the “ China Hand Restrictive Period ”).

5.   Tag-Along Rights in Private Transactions .

a.   Subject to the restrictions set forth in Sections 3 (with respect to the Existing Shareholders) and 4 (with respect to China Hand) hereof, during the China Hand Restrictive Period, in the event China Hand proposes to make a Tag-Along Sale (as defined below), each Existing Shareholder shall have the right to participate (a " Tag-Along Right ") in such sale with respect to such Existing Shareholder’s Shares (on an as converted basis), on a pro rata basis (based on the ratio of the aggregate number of the Shares (on an as converted basis) to be sold by China Hand to the aggregate number of Shares (on an as converted basis) beneficially owned by China Hand immediately prior to such sale) on the same terms on which China Hand sells its Shares. For purpose of clarification and by way of example, if China Hand proposes to make a Tag-Along Sale of 10% of its Shares (on an as converted basis), each Existing Shareholder shall have the right to participate in such Tag-Along Sale with respect to 10% of its Shares (on an as converted basis). As to each Shareholder participating in the Tag Along Sale (including China Hand), the ratio that the number of Shares (on an as converted basis) of such Shareholder to be sold in such Tag-Along Sale bears to the total number of Shares (on an as converted basis) of all Shareholders to be sold in such Tag-Along Transaction is hereafter referred to as “ Relative Ratio ”.

b.   The following terms shall have the meanings set forth below: