EXECUTION VERSION

ESCROW AGREEMENT
 
THIS ESCROW AGREEMENT (this “Agreement”) is entered into this 15th day of
February, 2008, by and among Lehman Brothers Commercial Corporation Asia
Limited, a Hong Kong company (“LBCCA”), YA Global Investments, L.P., a Cayman
Islands limited partnership (“YAGI” and, together with LBCCA, the “Purchasers”),
China Automotive Systems, Inc., a Delaware corporation (the “Company”), and U.S.
Bank National Association, a national banking association, as escrow agent
hereunder (the “Escrow Agent”). Capitalized terms used herein and not otherwise
defined shall have the meanings assigned to such terms in the Purchase Agreement
(as defined below).
 
RECITALS
 
WHEREAS, the Purchasers and the Company have entered into that certain
Securities Purchase Agreement, dated as of February 1, 2008 (the “Purchase
Agreement”), pursuant to which the Purchasers agreed to purchase certain
securities of the Company; and
 
WHEREAS, pursuant to the terms of the Purchase Agreement, an amount equal to
$17,500,000 (the “Deposit Amount”) that would have otherwise been paid by the
Purchasers to the Company in connection with the transactions contemplated by
the Purchase Agreement is to be paid by the Purchasers to the Escrow Agent and
held in escrow (the “Escrow Account”), pursuant to the Purchase Agreement.
 
AGREEMENT
 
NOW, THEREFORE, in consideration of the mutual agreements and covenants
contained herein and other good and valuable consideration, the sufficiency of
which are hereby acknowledged, the parties hereto agree as follows:
 
1. Receipt of Escrow. By its signature below, the Escrow Agent acknowledges
receipt of funds from the Purchasers in an amount equal to the Deposit Amount
(together with the investment return thereon, the “Escrow Amount”).
 
2. Investment of Escrow. 
 
(a) The Escrow Amount shall be invested by the Escrow Agent in First American
Prime Obligation Fund - Class Y, or as otherwise directed by LBCCA and the
Company.
 
(b) All assets held in the Escrow Account shall be registered in the name of any
nominees selected by the Escrow Agent under this Agreement. With respect to any
funds received by the Escrow Agent for deposit into the Escrow Account or any
direction received by the Escrow Agent with respect to investment of any funds
in the Escrow Account after 10:00 a.m., Eastern Time, the Escrow Agent shall not
be required to invest such funds or to effect such investment instruction until
the next day upon which banks in New York City are open for business. The Escrow
Agent shall be entitled to sell or redeem any such investment as necessary to
make any distributions required under this Agreement and shall not be liable or
responsible for any loss resulting from any such sale or redemption.
 

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3. Release of Escrow.
 
(a) On or prior to April 30, 2008, the Purchasers and the Company shall deliver
to the Escrow Agent, joint written instructions (“Joint Written Instructions”)
setting forth instructions for the Escrow Agent to release all or a portion of
the Escrow Amount in an amount set forth therein to the Purchasers (pro rata in
accordance with their respective Applicable Percentages (as defined below)) or
to the Company, as the case may be, as specified in such Joint Written
Instructions. The “Applicable Percentage” of each Purchaser is set forth
opposite such Purchaser’s name on Annex A attached hereto.
 
(b) The Escrow Agent shall release all or portion of the Escrow Amount as
expressly directed by the Joint Written Instructions.
 
(c) The Purchasers and the Company agree that they will act in good faith to
execute the Joint Written Instructions in accordance with the terms of this
Agreement and the Purchase Agreement.
 
(d) Notwithstanding the foregoing, the Escrow Agent shall disburse the Escrow
Amount (or any portion thereof) in accordance with a notice from either the
Purchasers or the Company of a final, non-appealable order from a court of
competent jurisdiction in the United States, along with a copy of such order,
pursuant to which such court has determined whether and to what extent the
Purchasers or the Company, as applicable, are entitled to the Escrow Amount (or
any portion thereof).
 
4. Duties of the Escrow Agent.
 
(a) Duties in General.
 
(i) The Escrow Agent undertakes to perform only such duties as are expressly set
forth herein (and required by applicable law), which the parties agree are
ministerial in nature, and no duties shall be implied. If in doubt as to its
duties and responsibilities hereunder, the Escrow Agent may consult with counsel
of its choice and shall be protected in any action taken or omitted in
connection with the advice or opinion of such counsel.
 
(ii) If the Escrow Agent becomes involved in litigation with respect to this
Agreement for any reason, it is hereby authorized to deposit the Escrow Amount
with the clerk of such court in which such litigation is pending, or to
interplead all interested parties in any court of competent jurisdiction and to
deposit with the clerk of such court the Escrow Amount. Upon the happening of
either of the above, the Escrow Agent shall be fully relieved and discharged of
any further duties hereunder.
 
(iii) If, at any time, (i) there shall exist any dispute among the parties
hereto with respect to the holding or disposition of any portion of the Escrow
Amount or any other obligations of the Escrow Agent hereunder, (ii) the Escrow
Agent is unable to determine, to the Escrow Agent’s sole satisfaction, the
proper disposition of any portion of the Escrow Amount or the Escrow Agent’s
proper actions with respect to its obligations hereunder, or (iii) the
Purchasers and the Company have not within fifteen (15) business days of the
furnishing by the Escrow Agent of a notice of resignation pursuant to Section 6,
appointed a successor Escrow Agent to act hereunder, then the Escrow Agent may,
in its sole discretion, take either or both of the following actions:
 
(A) suspend the performance of any of its obligations under this Agreement until
such dispute or uncertainty shall be resolved to the sole satisfaction of the
Escrow Agent or until a successor Escrow Agent shall have been appointed (as the
case may be); or
 
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(B) petition (by means of an interpleader action or any other appropriate
method) any court of competent jurisdiction in any state or federal court
located in the State of New York, for instructions with respect to such dispute
or uncertainty, and to the extent required or permitted by law, pay into such
court, for holding and disposition in accordance with the instructions of such
court, the Escrow Amount, after deduction and payment to the Escrow Agent of all
fees and expenses (including court costs and reasonable attorneys’ fees) payable
to, actually incurred by, or reasonably expected to be incurred by the Escrow
Agent in connection with the performance of its duties and the exercise of its
rights hereunder.
 
The Escrow Agent shall have no liability to the Purchasers, the Company, their
respective shareholders or members or any other person with respect to any such
suspension of performance or disbursement into such court, including, without
limitation, any liability that may arise, or be alleged to have arisen, out of
or as a result of any delay in the disbursement of funds held in the Escrow
Account or any delay in or with respect to any other action required or
requested of the Escrow Agent.
 
(b) Exculpation.  
 
(i) The Escrow Agent shall have no liability under and no duty to inquire as to
the provisions of any agreement other than this Agreement (except as to the
capitalized terms used herein and defined in the Purchase Agreement). The Escrow
Agent shall not be liable for any action taken or omitted by it in good faith
except to the extent that a court of competent jurisdiction determines that the
Escrow Agent’s gross negligence or willful misconduct was the primary cause of
any loss to the Purchasers or the Company. The Escrow Agent’s sole
responsibility shall be for the safekeeping and disbursement of the Escrow
Amount in accordance with the terms of this Agreement. The Escrow Agent may rely
upon any notice, instruction, request or other instrument, not only as to its
due execution, validity and effectiveness, but also as to the truth and accuracy
of any information contained therein, which the Escrow Agent shall believe to be
genuine and to have been signed or presented by the person or parties purporting
to sign the same. In no event shall the Escrow Agent be liable for incidental,
indirect, special, and consequential or punitive damages (including, without
limitation, lost profits), even if the Escrow Agent has been advised of the
likelihood of such loss or damage and regardless of the form of action. The
Escrow Agent shall not be obligated to take any legal action or commence any
proceeding in connection with the Escrow Account, any account in which the
Escrow Amount is deposited, this Agreement or the Purchase Agreement, or to
appear in, prosecute or defend any such legal action or proceeding. The Escrow
Agent may consult legal counsel selected by it in the event of any dispute or
question as to the construction of any of the provisions hereof or of any other
agreement or of its duties hereunder, or relating to any dispute involving any
party hereto, and shall incur no liability and shall be fully protected from any
liability whatsoever in acting in accordance with a written opinion of such
counsel. Each of the Purchasers (in accordance with their Applicable
Percentages), on the one hand, and the Company, on the other hand, severally and
not jointly, shall promptly pay, upon demand, one-half of the reasonable fees
and expenses of any such legal counsel.
 
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(ii) The Escrow Agent is authorized, in its sole discretion, to comply with
orders issued or process entered by any court of competent jurisdiction with
respect to the Escrow Account. If any portion of the Escrow Amount is at any
time attached, garnished or levied upon under any court order, or in case the
payment, assignment, transfer, conveyance or delivery of any such property shall
be stayed or enjoined by any court order, or in case any order, judgment or
decree shall be made or entered by any court of competent jurisdiction affecting
such property or any part thereof, then and in any such event, the Escrow Agent
is authorized, in its sole discretion, to rely upon and comply with any such
order, writ, judgment or decree; and if the Escrow Agent complies with any such
order, writ, judgment or decree, it shall not be liable to any of the parties
hereto or to any other person or entity by reason of such compliance even though
such order, writ, judgment or decree may be subsequently reversed, modified,
annulled, set aside or vacated.
 
(c) No Additional Duties. The Escrow Agent shall have no duties except those
that are expressly set forth herein, and it shall not be bound by any notice of
a claim or demand hereunder, or any waiver, modification, amendment, termination
or rescission of this Agreement, unless received by it in writing.
 
(d) Miscellaneous. The Escrow Agent may execute any of its powers or
responsibilities hereunder and exercise any rights hereunder either directly or
by or through its agents or attorneys. The Escrow Agent shall not be responsible
for and shall not be under a duty to examine or pass upon the validity, binding
effect, execution or sufficiency of this Agreement or of any agreement
amendatory or supplemental hereto.
 
5. Indemnification of the Escrow Agent. 
 
(a) From and at all times after the date of this Agreement, each of the
Purchasers (in accordance with their Applicable Percentages), on the one hand,
and the Company, on the other hand, severally and not jointly, shall, to the
fullest extent permitted by law, defend, indemnify and hold harmless the Escrow
Agent and each director, officer, employee, attorney, agent and affiliate of the
Escrow Agent (collectively, the “Indemnified Parties”) against one-half of any
and all actions, claims (whether or not valid), losses, damages, liabilities,
costs and expenses of any kind or nature whatsoever (including, without
limitation, reasonable attorneys’ fees, costs and expenses) incurred by or
asserted against any of the Indemnified Parties from and after the date hereof,
whether direct, indirect or consequential, as a result of or arising from or in
any way relating to any claim, demand, suit, action or proceeding (including any
inquiry or investigation) by any person, including, without limitation, the
Purchasers or the Company, whether threatened or initiated, asserting a claim
for any legal or equitable remedy against any person under any statute or
regulation, including, without limitation, any federal or state securities laws,
or under any common law or equitable cause or otherwise, arising from or in
connection with the negotiation, preparation, execution, performance or failure
of performance of this Agreement or any transactions contemplated herein,
whether or not any such Indemnified Party is a party to any such action,
proceeding, suit or the target of any such inquiry or investigation; provided,
however, that no Indemnified Party shall have the right to be indemnified
hereunder for any liability finally determined by a court of competent
jurisdiction, subject to no further appeal, to have resulted primarily from the
gross negligence or willful misconduct of such Indemnified Party. The
Indemnified Parties (as a group) shall have the right to select and employ a
single firm of counsel with respect to any action or claim brought or asserted
against them, provided that such counsel is reasonably acceptable to the
Purchasers and the Company, and one-half of the reasonable fees of such counsel
shall be paid upon demand by each of the Purchasers (in accordance with their
Applicable Percentages), on the one hand, and the Company, on the other hand,
severally and not jointly. The obligations of the Purchasers and the Company
under this Section 5 shall survive any termination of this Agreement and the
resignation or removal of the Escrow Agent.
 
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(b) The parties agree that neither the payment by the Purchasers or the Company
of any claim by the Escrow Agent for indemnification hereunder nor the
disbursement of any amounts to the Escrow Agent from the Escrow in respect of a
claim by the Escrow Agent for indemnification shall impair, limit, modify, or
affect, as between the Purchasers or the Company, the respective rights and
obligations of the Purchasers, on the one hand, and the Company, on the other
hand, under the Purchase Agreement.
 
6. Resignation of the Escrow Agent. The Escrow Agent, and any successor Escrow
Agent, may resign at any time as Escrow Agent hereunder by giving at least
fifteen (15) business days written notice to the parties. Upon such resignation
and the appointment of a successor Escrow Agent, the resigning Escrow Agent
shall be absolved from any duties as Escrow Agent hereunder. Upon their receipt
of notice of resignation from the Escrow Agent, the Purchasers and the Company
shall use their reasonable best efforts jointly to designate a successor Escrow
Agent. If the parties do not agree upon a successor Escrow Agent within fifteen
(15) business days after the receipt by the parties of the Escrow Agent’s
resignation notice, the Escrow Agent may petition any court of competent
jurisdiction for the appointment of a successor Escrow Agent or other
appropriate relief (including, without limitation, an interpleader action) and
any such resulting appointment shall be binding upon all parties hereto. By
mutual agreement, the Purchasers and the Company, acting together, shall have
the right at any time upon not less than ten (10) business days written notice
to terminate their appointment of the Escrow Agent, or any successor Escrow
Agent, as Escrow Agent hereunder. Notwithstanding anything to the contrary in
the foregoing, the Escrow Agent or any successor Escrow Agent shall continue to
act as the Escrow Agent until a successor is appointed and qualified to act as
the Escrow Agent. The resigning Escrow Agent shall transmit all records
pertaining to the Escrow Account and shall pay the Escrow Amount to the
successor Escrow Agent, after making copies of such records as the resigning
Escrow Agent deems advisable and after deduction and payment to the resigning
Escrow Agent of all fees and expenses (including court costs and reasonable
attorneys’ fees) payable to, actually incurred by, or reasonably expected to be
incurred by the retiring Escrow Agent in connection with the performance of its
duties and the exercise of its rights hereunder. After any resigning Escrow
Agent’s resignation or removal, the provisions of this Agreement shall inure to
its benefit and survive with respect to any actions taken or omitted to be taken
by such resigning Escrow Agent while it was the Escrow Agent under this
Agreement. Any corporation or association into which the Escrow Agent may be
merged or converted or with which it may be consolidated, or any corporation or
association to which all or substantially all of the escrow business of the
Escrow Agent’s corporate trust line of business may be transferred, shall be the
Escrow Agent under this Agreement without further act.
 
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7. Taxes.
 
(a) For U.S. federal (and all relevant state and local) income tax purposes,
each party hereto agrees to treat the party receiving the Escrow Amount as set
forth in the Joint Written Instructions as the owner of the funds in the Escrow
Account (including any portion thereof that is invested or reinvested under the
terms of this Agreement) and any interest or other earnings on such funds, which
shall be allocated to such party and so reported, to the extent necessary, to
the Internal Revenue Service and any other taxing authority.
 
(b) The correct Taxpayer Identification Number (“TIN”) assigned by the Internal
Revenue Service for each Purchaser and the Company is set forth in Annex A.
Promptly following the execution of this Agreement, each Purchaser and the
Company shall, to the extent applicable, provide the Escrow Agent with a fully
executed W-8 or W-9 Internal Revenue Service form.
 
8. Notices. All notices and other communications required or permitted pursuant
to this Agreement shall be in writing and be deemed to have been duly given and
delivered: (i) upon receipt, when delivered personally; (ii) upon receipt, when
sent by facsimile (provided confirmation of transmission is mechanically or
electronically generated and kept on file by the sending party); or (iii) one
(1) business day after deposit with an internationally recognized courier
service, in each case properly addressed to the party to receive the same. The
addresses and facsimile numbers for such communications shall be:
 
If to the Purchasers:

Lehman Brothers Commercial Corporation Asia Limited
24F, Two International Finance Center
8, Finance Street
Central, Hong Kong
Attention: Steven Qian
Facsimile: (852) 2372-5468

and

YA Global Investments, L.P.
c/o Yorkville Advisors, LLC
101 Hudson Street, Suite 3700
Jersey City, NJ 07302
Attention: David Gonzalez
Facsimile: (201) 985-8744
 
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With a copy to:

Goodwin Procter LLP
901 New York Avenue, N.W.
Washington, DC 20001
Attention: James A. Hutchinson, Esq.
Facsimile: (202) 346-4444

If to the Company:

China Automotive Systems, Inc.
No. 1 Henglong Road
Yu Giao Development Zone
Shashi District, Jing Zhou City
Hubei Province, People’s Republic of China
Attention: Hanlin Chen
Facsimile: (86) 27-5980-8808

With a copy to:

Heller Ehrman LLP
4350 La Jolla Village Drive, 7th Floor
San Diego, CA 92122
Attention: Hayden J. Trubitt, Esq.
Facsimile: (858) 587-5903

If to the Escrow Agent:
 
U.S. Bank Corporate Trust Services
1021 E. Cary Street, Suite 1850
Richmond, VA  23219
Attention: Stephanie E. Haysley
Facsimile:  (804) 343-1572

or to such other address as such party shall specify by written notice to the
other parties hereto. Any notice sent to the Escrow Agent shall also be sent to
the other parties to this Agreement.
 
9. Fees and Expenses. All fees and expenses of, and incurred by, the Escrow
Agent in connection with the performance of its obligations hereunder shall be
paid one-half by the Company and one-half by the Purchasers (in accordance with
their respective Applicable Percentages) in accordance with Annex B. In
addition, the Escrow Agent shall be reimbursed for all its reasonable
out-of-pocket expenses, including attorney’s fees, travel expenses, telephone
and facsimile transmission costs, postage (including express mail and overnight
delivery charges), copying charges and the like. All of the compensation and
reimbursement obligations set forth in this Section 9 shall be payable upon
demand by the Escrow Agent, after presentation of a statement in reasonable
detail by the Escrow Agent.
 
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10. Assignment. The Purchasers and the Company may assign rights under this
Agreement to the same extent they are permitted to assign their rights and
obligations under the Purchase Agreement.
 
11. Miscellaneous. This Agreement, and with respect to the Purchasers and the
Company, the Purchase Agreement, embody the entire agreement and understanding
of the parties concerning the Escrow Amount, and, in the event of any
inconsistency between this Agreement and the Purchase Agreement, the Purchase
Agreement shall control. This Agreement may be amended or waived only by a
writing signed by the Company, the Purchasers and the Escrow Agent. The headings
in this Agreement are intended solely for convenience of reference and shall be
given no effect in the construction or interpretation of this Agreement. This
Agreement shall be governed by and construed in accordance with the laws of the
State of New York. This Agreement shall bind and inure to the benefit of the
parties hereto and their respective successors and permitted assigns. This
Agreement may be executed in two or more identical counterparts, all of which
shall be considered one and the same agreement and shall become effective when
counterparts have been signed by each party and delivered to the other party;
provided that a facsimile signature shall be considered due execution and shall
be binding upon the signatory thereto with the same force and effect as if the
signature were an original, not a facsimile signature.

 
[SIGNATURE PAGE FOLLOWS]
 
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To evidence their agreement, the parties have caused this Escrow Agreement to be
executed on the date first written above.

      PURCHASERS: LEHMAN BROTHERS COMMERCIAL CORPORATION ASIA LIMITED  
   
   
  By:   /s/ Steven J. Qian  

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Name: Steven J. Qian
Title:   Senior Vice President
 

        YA GLOBAL INVESTMENTS, L.P.  
   
   
  By:   /s/ Yorkville Advisors, LLC,     Investment Manager               By:  
/s/ Mark Angelo  

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Name: Mark Angelo
Title:   President and Portfolio Manager
 

      COMPANY:  CHINA AUTOMOTIVE SYSTEMS, INC.  
   
   
  By:   /s/ Hanlin Chan  

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Name: Hanlin Chan
Title:   Chairman

 
 
[Escrow Agreement Signature Page]
 

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      ESCROW AGENT:  US BANK NATIONAL ASSOCIATION  
   
   
  By:   /s/ Stephanie E. Haysley  

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Name: Stephanie E. Haysley
Title:   Vice President
 

 
 
[Escrow Agreement Signature Page]
 

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ANNEX A

Purchaser
 
TIN
 
Applicable Percentage
 
Lehman Brothers Commercial Corporation Asia Limited
   
N/A
   
85.7142858
%
YA Global Investments, L.P.
   
13-4150836
   
14.2857142
%
Total
         
100.0000000
%

 
 

 

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ANNEX B

Escrow Agent Fees.

Acceptance Fee:
  $Waived  
Administration Fee:
  $1,250  
Transactional Costs:
  $Waived  
Out of Pocket Expenses:
  $Waived  

 
The Administration Fee is payable upon execution of the escrow documents. In the
event the escrow is not funded, the Administration Fee and all related expenses,
including attorneys’ fees, remain due and payable, and if paid, will not be
refunded.

The fees quoted in this schedule apply to services ordinarily rendered in the
administration of an Escrow Account and are subject to reasonable adjustment
based on final review of documents, or when the Escrow Agent is called upon to
undertake unusual duties or responsibilities, or as changes in law, procedures,
or the cost of doing business demand. Services in addition to and not
contemplated in this Escrow Agreement, including, but not limited to, document
amendments and revisions, non-standard cash and/or investment transactions,
calculations, notices and reports, and legal fees, will be billed as
extraordinary expenses.

Unless otherwise indicated, the above fees relate to the establishment of one
escrow account. Additional sub-accounts governed by the same Escrow Agreement
may incur an additional charge. Transaction costs include charges for wire
transfers, checks, internal transfers and securities transactions.

To help the government fight the funding of terrorism and money laundering
activities, Federal law requires all financial institutions to obtain, verify
and record information that identifies each person who opens an account. For a
non-individual person such as a business entity, a charity, a Trust or other
legal entity Agent will ask for documentation to verify its formation and
existence as a legal entity. Agent may also ask to see financial statements,
licenses, identification, and authorization documents from individuals claiming
authority to represent the entity or other relevant documentation.
 
Acknowledgement:
 

LBCCA   _________ [initials]   _________ [date]               YAGI   _________
[initials]   _________ [date]               Company   _________ [initials]  
_________ [date]  

 

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