CLOSING ESCROW AGREEMENT
 
This Closing Escrow Agreement dated as of April 30, 2009 (this “Agreement”) is
entered into by and among China New Energy Group Company, a Delaware corporation
(the “Company”), China Hand Fund I, LLC, a Delaware limited liability company
(together with its successors and assigns, “CHF” or the “Initial Purchaser”),
each of the persons who hereafter become investors in the Company pursuant to
the Purchase Agreement (as defined below) (together with its successors and
assigns, each, an “Additional Purchaser” and collectively, the “Additional
Purchasers” and together with the Initial Purchasers, the (“Purchasers”), and
Escrow, LLC, with an address at 360 Main Street, P.O. Box 391, Washington,
Virginia 22747 (the “Escrow Agent”). Capitalized terms used but not defined
herein shall have the meanings set forth in the Purchase Agreement.
 
WITNESSETH:
 
WHEREAS, the Initial Purchaser may purchase from the Company shares of the
Company’s Series B Convertible Preferred Stock, par value $0.001 per share (the
“Series B Preferred”), convertible into shares of the Company’s common stock,
par value $0.001 per share (the “Common Stock”), and certain common stock
purchase warrants (the “Warrants” and together with the Series B Preferred, the
“Securities”) pursuant to a Series B Convertible Preferred Stock Purchase
Agreement to be entered into on the closing date of such agreement (the “Closing
Date”) by and among the Company and the Initial Purchaser (the “Purchase
Agreement”).

WHEREAS, the Company desires to deposit all monies received from the Purchasers
pending the closings under the Purchase Agreement (the “Escrowed Funds”) with
the Escrow Agent, to be held in escrow until joint written instructions are
received by the Escrow Agent from the Company and the Initial Purchaser, from
time to time, at which time the Escrow Agent will disburse the Escrowed Funds in
accordance with the instructions; and

WHEREAS, Escrow Agent is willing to hold the Escrowed Funds in escrow subject to
the terms and conditions of this Agreement.

NOW, THEREFORE, in consideration of the mutual promises herein contained and
intending to be legally bound, the parties hereby agree as follows:

1.        Appointment of Escrow Agent. The Company hereby appoints the Escrow
Agent as escrow agent in accordance with the terms and conditions set forth
herein and the Escrow Agent hereby accepts such appointment.

 
 

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2.        Delivery of the Escrowed Funds. 

2.1      The Company will direct Purchasers to deliver the Escrowed Funds to the
Escrow Agent, addressed to the following account of the Escrow Agent:
Domestic:

Virginia Commerce Bank
Leesburg, VA
ABA#056005253
Account Name: Escrow, LLC
Account #: 01194186

International:

Correspondent Bank: Wells Fargo Bank, San Francisco, CA
SWIFT#: WFBIUS6S
Credit Account #: 412-11-08146
Virginia Commerce Bank
FBO Account Name: Escrow, LLC
Account: 01194186

2.2 (a)        All Purchasers’ checks shall be made payable to “ESCROW, LLC and
shall be delivered to the Escrow Agent at the address set forth on Exhibit A
hereto and shall be accompanied by a written account of the subscription in the
form attached hereto as Exhibit B (the “Subscription Information”). The Escrow
Agent shall, upon receipt of Escrowed Funds deposit such funds in escrow and
such funds shall constitute the Escrowed Funds.

2.3        Any checks which are received by the Escrow Agent that are made
payable to a person other than the Escrow Agent shall be returned directly to
the sender together with any documents delivered therewith.   Simultaneously
with each deposit, the Company shall provide the Escrow Agent with the
Subscription Information to include the name, address and taxpayer
identification number of each Purchaser.  The Escrow Agent is not obligated, and
may refuse, to accept checks that are not accompanied by Subscription
Information.

2.4        In the event a wire transfer is received by the Escrow Agent and the
Escrow Agent has not received Subscription Information, the Escrow Agent shall
notify the Company. If the Escrow Agent does not receive the Subscription
Information relating to a Purchaser prior to the close of business on the third
business day (days other than a Saturday or Sunday or other day on which the
Escrow Agent is not open for business in the State of Virginia) after notifying
Company of receipt of said wire, the Escrow Agent shall return the funds to the
Purchaser. 

 
 

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3.        Escrow Agent to Hold and Disburse Escrowed Funds. The Escrow Agent
will hold and disburse the Escrowed Funds received by it pursuant to the terms
of this Escrow Agreement, as follows:

3.1      Upon receipt of joint instructions from the Company and the Initial
Purchaser in substantially the form of Exhibit C hereto which instructions shall
be signed by James Li on behalf of the Company (or such other person as he shall
designate in writing via email)  the Escrow Agent shall release the Escrowed
Funds as directed in such instructions.  The Company and the Initial Purchaser
agree that if the Purchase Agreement is consummated, then on the Closing Date
they will deliver joint written instructions to release to the Company the
aggregate amount of the subscriptions deposited by the Purchasers less (x)
payments to be made for investor legal and due diligence expenses, not exceeding
$100,000, and (y) placement agent fees equal to $540,000 (representing 10% of
the aggregate amount of subscriptions).

3.2      In the event this Agreement, the Escrowed Funds or the Escrow Agent
becomes the subject of litigation, or if the Escrow Agent shall desire to do so
for any other reason, the Company authorizes the Escrow Agent, at its option, to
deposit the Escrowed Funds with the clerk of the court in which the litigation
is pending, or a court of competent jurisdiction if no litigation is pending,
and thereupon the Escrow Agent shall be fully relieved and discharged of any
further responsibility with regard thereto. The Company also hereby authorizes
the Escrow Agent, if it receives conflicting claims to the Escrowed Funds, is
threatened with litigation or if the Escrow Agent shall desire to do so for any
other reason, to interplead all interested parties in any court of competent
jurisdiction and to deposit the Escrowed Funds with the clerk of that court and
thereupon the Escrow Agent shall be fully relieved and discharged of any further
responsibility hereunder to the parties from which they were received.

3.3      In the event that the Escrow Agent does not receive any instructions by
a date that is 90 days from the date of this Agreement (the “Escrow Termination
Date”), all Escrowed Funds shall be returned to the parties from which they were
received, without interest thereon or deduction therefrom. If the Escrow Agent
does receive joint written instructions by the Escrow Termination Date, then the
Escrow Agent shall continue to hold all undisbursed Escrowed Funds until the
Escrow Agent receives joint written instructions from the Initial Purchaser and
the Company covering all remaining Escrowed Funds.

 
 

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4.        Exculpation and Indemnification of Escrow Agent

4.1      The Escrow Agent shall haven no duties or responsibilities other than
those expressly set forth herein.  The Escrow Agent shall have no duty to
enforce any obligation of any person to make any payment or delivery, or to
direct or cause any payment or delivery to be made, or to enforce any obligation
of any person to perform any other act.  The Escrow Agent shall be under no
liability to the other parties hereto or anyone else, by reason of any failure,
on the part of any party hereto or any maker, guarantor, endorser or other
signatory of a document or any other person, to perform such person’s
obligations under any such document. Except for amendments to this Escrow
Agreement referenced below, and except for joint written instructions given to
the Escrow Agent by the escrowing parties relating to the Escrowed Funds, the
Escrow Agent shall not be obligated to recognize any agreement between or among
any of the escrowing parties, notwithstanding that references hereto may be made
herein and whether or not it has knowledge thereof.

4.2      The Escrow Agent shall not be liable to the Company or to anyone else
for any action taken or omitted by it, or any action suffered by it to be taken
or omitted, in good faith and acting upon any order, notice, demand,
certificate, opinion or advice of counsel (including counsel chosen by the
Escrow Agent), statement, instrument, report, or other paper or document (not
only as to its due execution and the validity and effectiveness of its
provisions, but also as to the truth and acceptability of any information
therein contained), which is believed by the Escrow Agent to be genuine and to
be signed or presented by the proper person or persons. The Escrow Agent shall
not be bound by any of the terms thereof, unless evidenced by written notice
delivered to the Escrow Agent signed by the proper party or parties and, if the
duties or rights of the Escrow Agent are affected, unless it shall give its
prior written consent thereto.

4.3      The Escrow Agent shall not be responsible for the sufficiency or
accuracy of the form, or of the execution, validity, value or genuineness of,
any document or property received, held or delivered to it hereunder, or of any
signature or endorsement thereon, or for any lack of endorsement thereon, or for
any description therein; nor shall the Escrow Agent be responsible or liable to
the Company, the Initial Purchaser, the Additional Purchasers or to anyone else
in any respect on account of the identity, authority or rights, of the person
executing or delivering or purporting to execute or deliver any document or
property or this Escrow Agreement. The Escrow Agent shall have no responsibility
with respect to the use or application of the Escrowed Funds pursuant to the
provisions hereof.

4.4      The Escrow Agent shall have the right to assume, in the absence of
written notice to the contrary from the proper person or persons, that a fact or
an event, by reason of which an action would or might be taken by the Escrow
Agent, does not exist or has not occurred, without incurring liability to the
Company, the Initial Purchaser, the Additional Purchasers or to anyone else for
any action taken or omitted to be taken or omitted, in good faith and in the
exercise of its own best judgment, in reliance upon such assumption.

 
 

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4.5      To the extent that the Escrow Agent becomes liable for the payment of
taxes, including withholding taxes, in respect of income derived from the
investment of the Escrowed Funds, or any payment made hereunder, the Escrow
Agent may pay such taxes; and the Escrow Agent may withhold from any payment of
the Escrowed Funds such amount as the Escrow Agent estimates to be sufficient to
provide for the payment of such taxes not yet paid, and may use the sum withheld
for that purpose. The Escrow Agent shall be indemnified and held harmless
against any liability for taxes and for any penalties in respect of taxes, on
such investment income or payments in the manner provided in Section 4.6.

4.6      The Escrow Agent will be indemnified and held harmless by the Company
from and against all expenses, including all counsel fees and disbursements, or
loss suffered by the Escrow Agent in connection with any action, suit or
proceedings involving any claim, or in connection with any claim or demand,
which in any way, directly or indirectly, arises out of or relates to this
Escrow Agreement, the services of the Escrow Agent hereunder, except for claims
relating to gross negligence by Escrow Agent or breach of this Escrow Agreement
by the Escrow Agent, or the monies or other property held by it hereunder.
Promptly after the receipt of the Escrow Agent of notice of any demand or claim
or the commencement of any action, suit or proceeding, the Escrow Agent shall,
if a claim in respect thereof is to be made against a party to this Agreement,
notify each of them thereof in writing, but the failure by the Escrow Agent to
give such notice shall not relieve any such party from any liability which a
party may have to the Escrow Agent hereunder. Notwithstanding any obligation to
make payments and deliveries hereunder, the Escrow Agent may retain and hold for
such time as it deems necessary such amount of monies or property as it shall,
from time to time, in its sole discretion, seem sufficient to indemnify itself
for any such loss or expense and for any amounts due it under Section 7.

4.7      For purposes hereof, the term “expense or loss” shall include all
amounts paid or payable to satisfy any claim, demand or liability, or in
settlement of any claim, demand, action, suit or proceeding settled with the
express written consent of the Escrow Agent, and all costs and expenses,
including, but not limited to, counsel fees and disbursements, paid or incurred
in investigating or defending against any such claim, demand, action, suit or
proceeding.

5.        Termination of Agreement and Resignation of Escrow Agent

5.1      This Escrow Agreement shall terminate upon disbursement of all of the
Escrowed Funds, provided that the rights of the Escrow Agent and the obligations
of the Company under Section 4 shall survive the termination hereof.

 
 

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5.2      The Escrow Agent may resign at any time and be discharged from its
duties as Escrow Agent hereunder by giving the Company at least five (5)
business days written notice thereof (the “Notice Period”). As soon as
practicable after its resignation, the Escrow Agent shall, if it receives notice
from the Company within the Notice Period, turn over to a successor escrow agent
appointed by the Company all Escrowed Funds (less such amount as the Escrow
Agent is entitled to retain pursuant to Section 7) upon presentation of the
document appointing the new escrow agent and its acceptance thereof. If no new
agent is so appointed within the Notice Period, the Escrow Agent shall return
the Escrowed Funds to the parties from which they were received without interest
or deduction.

6.        Form of Payments by Escrow Agent

6.1      Any payments of the Escrowed Funds by the Escrow Agent pursuant to the
terms of this Escrow Agreement shall be made by wire transfer unless directed to
be made by check by the Company and the Initial Purchaser.

6.2      All amounts referred to herein are expressed in United States Dollars
and all payments by the Escrow Agent shall be made in such dollars.

7.        Compensation.  The Escrow Agent shall be entitled to the following
compensation from the Company:
 
7.1
Documentation Fee: The Company shall pay a documentation fee to the Escrow Agent
of $1,500, on the Closing Date.

7.2 
Closing Fee: The Company shall pay a fee of $500 to the Escrow Agent at each
Closing. For purposes of this Section 7.2, a Closing shall mean each time the
Escrow Agent receives joint instructions from the Company and the Initial
Purchaser to disburse Escrowed Funds in accordance with the terms of this
Agreement.

7.3
 Interest. The Company hereby agrees that Escrow Agent shall retain 100% of the
interest earned during the time the Escrowed Funds are held in escrow hereunder.

 
8.        Notices. All notices, requests, demands, and other communications
provided herein shall be in writing, shall be delivered by hand or by
first-class mail, shall be deemed given when received and shall be addressed to
parties hereto at their respective addresses first set forth in the recitals
above and on Exhibit A hereto.

9.        Further Assurances        From time to time on and after the date
hereof, the Company shall deliver or cause to be delivered to the Escrow Agent
such further documents and instruments and shall do and cause to be done such
further acts as the Escrow Agent shall reasonably request (it being understood
that the Escrow Agent shall have no obligation to make any such request) to
carry out more effectively the provisions and purposes of this Escrow Agreement,
to evidence compliance herewith or to assure itself that it is protected in
acting hereunder.

 
 

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10.      Consent to Service of Process        The Company hereby irrevocably
consents to the jurisdiction of the courts of the State of Virginia and of any
Federal court located in such state in connection with any action, suit or
proceedings arising out of or relating to this Escrow Agreement or any action
taken or omitted hereunder, and waives personal service of any summons,
complaint or other process and agrees that the service thereof may be made by
certified or registered mail directed to it at the address listed on Exhibit A
hereto.

11.      Miscellaneous

11.1    This Escrow Agreement shall be construed without regard to any
presumption or other rule requiring construction against the party causing such
instrument to be drafted. The terms “hereby,” “hereof,” “hereunder,” and any
similar terms, as used in this Escrow Agreement, refer to the Escrow Agreement
in its entirety and not only to the particular portion of this Escrow Agreement
where the term is used. The word “person” shall mean any natural person,
partnership, corporation, government and any other form of business of legal
entity. All words or terms used in this Escrow Agreement, regardless of the
number or gender in which they were used, shall be deemed to include any other
number and any other gender as the context may require. This Escrow Agreement
shall not be admissible in evidence to construe the provisions of any prior
agreement.

11.2    This Escrow Agreement and the rights and obligations hereunder of the
Company may not be assigned. This Escrow Agreement and the rights and
obligations hereunder of the Escrow Agent may be assigned by the Escrow Agent.
This Escrow Agreement shall be binding upon and inure to the benefit of each
party’s respective successors, heirs and permitted assigns. No other person
shall acquire or have any rights under or by virtue of this Escrow Agreement.
This Escrow Agreement may not be changed orally or modified, amended or
supplemented without an express written agreement executed by the Escrow Agent,
the Company and the Initial Purchaser. This Escrow Agreement is intended to be
for the sole benefit of the parties hereto and the Additional Purchasers and
their respective successors, heirs and permitted assigns, and none of the
provisions of this Escrow Agreement are intended to be, nor shall they be
construed to be, for the benefit of any third person.

11.3    This Escrow Agreement shall be governed by, and construed in accordance
with, the internal laws of the State of Virginia. The representations and
warranties contained in this Escrow Agreement shall survive the execution and
delivery hereof and any investigations made by any party. The headings in this
Escrow Agreement are for purposes of reference only and shall not limit or
otherwise affect any of the terms thereof.

12.      Execution of Counterparts This Escrow Agreement may be executed in a
number of counterparts, by facsimile, each of which shall be deemed to be an
original as of those whose signature appears thereon, and all of which shall
together constitute one and the same instrument. This Escrow Agreement shall
become binding when one or more of the counterparts hereof, individually or
taken together, are signed by all the parties.

 
 

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[Remainder of page intentionally left blank
Signature pages follow]

 
 

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IN WITNESS WHEREOF, the parties have executed and delivered this Escrow
Agreement on the day and year first above written.

 
ESCROW AGENT:
       
ESCROW, LLC
         
By: 
 /s/ Johnnie Zarecor
       
COMPANY:
       
CHINA NEW ENERGY GROUP COMPANY
         
By: 
/s/ James Li
     
Name: James Li
     
Title: Authorized Signatory
       
INITIAL PURCHASER:
     
THE CHINA HAND FUND I, LLC
         
By: 
/s/ John D. Kuhns
     
Name: John D. Kuhns
     
Title: Member-Manager

 
 

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EXHIBIT A

PARTIES TO AGREEMENT
 
China New Energy Group Company
17th Floor, HongJi Building, JinWei Road
HeBei District
Tianjin, People’s Republic of China
Attention: _________________________
Tel. No.: __________________________
Fax No.: ___________________________
Email:
 
____________________________________
(Signature)   

Escrow, LLC

Escrow Agent:  Escrow, LLC

Contact: Johnnie L. Zarecor
20 Rock Pointe, Suite 204
Warrenton, VA 20186

Telephone: (540) 347-2212
Fax:               (540) 347-2291
Email: jzarecor@escrowllc.net
____________________________

China Hand Fund I, LLC
558 Lime Rock Road
Lakeville, CT  06039
Attn: Mary Fellows
Tel. No.: 860-435-7000
Fax No.: 860-435-6540
Email: mfellows@kuhnsbrothers.com
 
____________________________________ 
(Signature)

 
 

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EXHIBIT B

SUBCRIPTION INFORMATION

Name of Subscriber
         
Address of Subscriber
                                 
Amount of Securities Subscribed
   
 
         
US Dollar Amount Submitted
   
 
         
Taxpayer ID Number/ Social Security Number
   
 
   

 
 

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EXHIBIT C

DISBURSEMENT REQUEST

Pursuant to that certain Escrow Agreement by and among China New Energy Group
Company, The China Hand Fund I, LLC and Escrow, LLC., China New Energy Group
Company and The China Hand Fund I, LLC hereby request disbursement of funds in
the amount and manner described below from Cardinal Bank account number
_____________, styled Escrow, LLC Escrow Account.

Please disburse to:
         
Amount to disburse:
         
Form of distribution:
         
Payee:
   
Name:
   
Address:
   
City/State:
   
Zip:
         
Bank:
         

 
Statement of event or condition which calls for this request for disbursement:
             

 
Disbursement approved by:
 
China New Energy Group Company

     
(Signature)
 
Date

The China Hand Fund I, LLC

     
(Signature)
 
Date

 
 
 

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