CHINA
NEW ENERGY GROUP COMPANY

      CERTIFICATE
OF DESIGNATIONS OF PREFERENCES,

      RIGHTS
AND LIMITATIONS

      OF

      SERIES
B CONVERTIBLE PREFERRED STOCK

      


              The
undersigned, James Li,
does hereby certify that:

       

      1.       
He is a director of CHINA NEW
ENERGY GROUP COMPANY, a Delaware corporation (the “Company”).

       

      2.        The
Company is authorized to issue 10,000,000 shares of Preferred Stock, par value
$0.001 per share (“Preferred Stock”), of
which 5,500,000 shares are designated as Series A Convertible Preferred Stock,
par value $0.001 per share (“Series A Preferred Stock”) and 2,461,0189  shares of such Series A
Preferred Stock are  issued and outstanding.

       

      3.        The
following resolutions were duly adopted by the Board of Directors of the Company
(the “Board of
Directors”):

       

      WHEREAS,
the Certificate of Incorporation of the Company provides for a class of its
authorized stock known as Preferred Stock, comprised of 10,000,000 shares,
$0.001 par value per share, issuable from time to time in one or more
series;

       

      WHEREAS,
the Board of Directors is authorized to fix the dividend rights, dividend rate,
voting rights, conversion rights, rights and terms of redemption and liquidation
preferences of any wholly unissued series of Preferred Stock and the number of
shares constituting any series and the designation thereof, of any of them;
and

       

      WHEREAS, it is the desire of the Board
of Directors, pursuant to its authority as aforesaid, to fix the rights,
preferences, restrictions and other matters relating to a series of the
preferred stock, which shall consist of up to 2,000,000 shares of the Preferred
Stock, which the Company has the authority to issue, as follows:

       

      NOW,
THEREFORE, BE IT RESOLVED, that the Board of Directors does hereby provide for
the issuance of a series of Preferred Stock for cash or exchange of other
securities, rights or property and does hereby fix and determine the rights,
preferences, restrictions and other matters relating to such series of Preferred
Stock as follows:

      


      TERMS OF PREFERRED
STOCK

      


      Section
1. Definitions. Capitalized terms used and
not otherwise defined herein shall have the meanings ascribed to such terms in
the Series B Convertible Preferred Stock Securities Purchase Agreement by and
between the Company, China Hand Fund, I, LLC, a Delaware limited liability
company (as amended, modified or supplemented from time to time in accordance
with its terms, a copy of which is on file at the principal offices of the
Company, the “Series B
Purchase Agreement”) For the purposes hereof, the following terms shall
have the following meanings:

       

      
        
          
          

        

        
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      “Affiliate” means,
with respect to any Person, any other Person directly or indirectly controlling,
directly or indirectly controlled by, or under direct or indirect common control
with, such Person or a member of such Person's immediate family; or if such
Person is a partnership, any general partner of such Person or a Person
controlling any such general partner.  For purposes of this
definition, "control" (including "controlled by" and "under common control
with") shall mean the power, directly or indirectly, to direct or cause the
direction of the management and policies of such Person whether through the
ownership of voting securities, by contract or otherwise.

       

      “Board of Directors”
means the Board of the Directors of the Company.

       

      “Certificate” means
this Certificate of Designations of Preferences, Rights and Limitations of
Series B Convertible Preferred Stock of China New Energy Group Company, as
amended from time to time.

       

      “Commission” means the
Securities and Exchange Commission of the United States of America.

      


      “Common Stock” means
the Company’s common stock, par value $0.001 per share, and stock of any other
class into which such shares may hereafter have been reclassified or
changed.

      


      “Conversion Date”
shall have the meaning set forth in Section 6(a).

      


      “Conversion Ratio”
shall mean the number of shares of Common Stock issuable upon conversion of one
share of Series B Preferred Stock.   Each share of Series B
Preferred Stock shall be initially convertible into to shares of Common Stock on
a 1-for-35 basis, subject to adjustment as provided in this
Certificate.

      


      “Conversion Price”
shall mean $0.138 per share, subject to adjustment as provided in this
Certificate.

      


      “Conversion Shares”
means, collectively, the shares of Common Stock issuable upon conversion of the
shares of Series B Preferred Stock in accordance with the terms of the Series B
Purchase Agreement and this Certificate.

      


      “Company” means China
New Energy Group Company, a Delaware corporation.

       

      “Exchange Act” means
the Securities Exchange Act of 1934, as amended.

      


      “Fundamental
Transaction” shall have the meaning set forth in Section 7(h)
hereof.

       

      “Holder” shall have
the meaning set forth in Section 2 hereof.

       

      “Liquidation” shall
have the meaning set forth in Section 5 hereof.

       

      “Liquidation Value”
shall have the meaning set forth in Section 5 hereof.

       

      
        
          
          

        

        
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      “Original Purchase
Price” shall mean $4.837 per share

       

       “Person” means a
corporation, an association, a partnership, a limited liability company, a
business association, an individual, a trust, a government or political
subdivision thereof or a governmental agency.

       

      “Purchaser” means any
purchaser who purchased shares of Series B Preferred Stock and Warrants pursuant
to the Series B Purchase Agreement.

       

      “Registration Rights
Agreement(s)” means the Amended and Restated Registration Rights
Agreement(s), to which the Company and the Purchasers are parties, as amended,
modified or supplemented from time to time in accordance with its
terms.

       

      “Securities Act” means
the Securities Act of 1933, as amended, and the rules and regulations
promulgated thereunder.

       

      “Series B Preferred
Stock” shall have the meaning set forth in Section 2 hereof.

       

      “Subsidiary” shall
mean a corporation, limited liability company, partnership, joint venture or
other business entity of which the Company owns beneficially or of record more
than a majority of the equity interests.

       

      “Trading Day” means a
day on which the Common Stock is traded on a Trading Market.

       

      “Trading Market” means
the following markets or exchanges on which the Common Stock is listed or quoted
for trading on the date in question: the American Stock Exchange, the New York
Stock Exchange, the NASDAQ Global Select Market, the NASDAQ Global Market, the
NASDAQ Capital Market or the OTC Bulletin Board.

       

      “Variable Rate
Transaction” shall have the meaning set forth in Section 7
hereof

       

      “VWAP” means, for any
date, the price determined by the first of the following clauses that applies:
(a) if the Common Stock is then listed or quoted on a Trading Market, the daily
volume weighted average price of the Common Stock for such date (or the nearest
preceding date) on the primary Trading Market on which the Common Stock is then
listed or quoted as reported by Bloomberg Financial L.P. (based on a Trading Day
from 9:30 a.m. EST to 4:02 p.m. Eastern Time) using the VAP function;
(b) if the Common Stock is not then listed or quoted on the Trading Market
and if prices for the Common Stock are then reported in the “Pink Sheets”
published by the National Quotation Bureau Incorporated (or a similar
organization or agency succeeding to its functions of reporting prices), the
most recent bid price per share of the Common Stock so reported; or (c) in
all other cases, the fair market value of a share of Common Stock as determined
by a nationally recognized-independent appraiser selected in good faith by the
Majority Holders.

       

      Rank of Series or
Classes.  For purposes of this Certificate, any stock of any
series or class of the Company shall be deemed to rank:

       

      (a)
senior to the shares of Series B Preferred Stock, as to dividends or upon
liquidation, dissolution or winding up, as the case may be, if the holders of
such class or classes shall be entitled to the receipt of dividends or of
amounts distributable upon dissolution, liquidation or winding up of the
Company, as the case may be, in preference or priority to the
Holders;

       

      
        
          
          

        

        
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      (b) on a
parity with shares of Series B Preferred Stock, as to dividends or upon
liquidation, dissolution or winding up, as the case may be, whether or not the
dividend rates, dividend payment dates or redemption or liquidation prices per
share or sinking fund provisions, if any, be different from those of Series B
Preferred Stock, if the holders of such stock shall be entitled to the receipt
of dividends or of amounts distributable upon dissolution, liquidation or
winding up of the Company, as the case may be, in proportion to their respective
dividend rates or liquidation prices, without preference or priority, one over
the other, as between the holders of such stock and the Holders;

       

      (c)
junior to shares of Series B Preferred Stock as to dividends or upon
liquidation, dissolution or winding up, as the case may be, if such class shall
be Common Stock or if the Holders shall be entitled to receipt of dividends or
of amounts distributable upon dissolution, liquidation or winding up of the
Company, as the case may be, in preference or priority to the holders of shares
of such class or classes.

       

      Section
2. Designation
and Amount.  The series of Preferred Stock, par value $0.001
per share shall be designated as the Company’s Series B Convertible Preferred
Stock (the “Series B
Preferred Stock”) and the number of shares so designated shall be
2,000,000 (which shall not be subject to increase without the consent of all of
the holders of at least 50% of the then outstanding shares of
Series  B Preferred Stock (each a “Holder” and
collectively, the “Holders”).   In
the event of the conversion of shares of Series B Preferred Stock into Common
Stock, pursuant to Section 6 hereof, or in the event that the Company shall
otherwise acquire and cancel any shares of Series  B Preferred Stock,
the shares of Series B Preferred Stock so converted or otherwise acquired and
canceled shall have the status of authorized but unissued shares of Preferred
Stock, without designation as to series until such stock is once more designated
as part of a particular series by the Board of Directors.  In
addition, if the Company shall not issue the maximum number of shares of Series
B Preferred Stock, the Company may, from time to time, by resolution of the
Board of Directors and the approval of the holders of a majority of the
outstanding shares of Series B Preferred Stock (the “Majority Holders”),
reduce the number of shares of Series B Preferred Stock authorized, provided,
that no such reduction shall reduce the number of authorized shares to a number
which is less than the number of shares of Series  B Preferred Stock
then issued or reserved for issuance.  The number of shares by which
the Series B Preferred Stock is reduced shall have the status of authorized but
unissued shares of Preferred Stock, without designation as to series, until such
stock is once more designated as part of a particular series by the Company’s
Board of Directors.  The Board of Directors shall cause to be filed
with the Secretary of State of the State of Delaware such certificate as shall
be necessary to reflect any reduction in the number of shares constituting the
Series B Preferred Stock.

      


      Section
3. Dividends
and Other Distributions.

      


      (a)     
For so long as any shares of Series B Preferred Stock shall remain outstanding,
no dividends shall be declared or payable with respect to the Common Stock. The
right of the Holders to receive dividends and/or other distributions provided in
this Section 3 shall rank pari passu with the holders of Series A Preferred
Stock.

       

      
        
          
          

        

        
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      (b)    
The Holders shall be entitled to cumulative dividends in preference to any
dividends on the Common Stock at the rate of 6% of the Original Purchase Price
per annum compounded daily and payable semi-annually. Dividends shall begin to
accrue on the date of issuance of the Series B Preferred Stock and shall be
computed on the basis of a 360-day year consisting of twelve 30-day months and
shall be payable semi-annually in arrears on June 1 and December 1 of each year
(each, a "Dividend
Date") with the first Dividend Date being June 1,
2009.   If a Dividend Date is not a business day, then the
dividend shall be due and payable on the business day immediately following such
Dividend Date.  Dividends shall be payable in shares of Common Stock
("Dividend
Shares") or, at the option of the Company, in cash, provided that the
dividends which accrued during any period shall be payable in cash only if the
Company indicates that the dividend will be paid in cash in the Dividend Notice
(as defined below).  At least five (5) days prior to the applicable
Dividend Date (the "Dividend Notice
Date"), the Company shall provide written notice (the "Dividend Notice") to
each Holder indicating that the dividend is to be paid in
cash.  Dividends paid in Dividend Shares shall be paid in a number of
fully paid and nonassessable shares (rounded up to the nearest whole share) of
Common Stock equal to the quotient of (i) the amount of interest payable divided
by (a) the product of (A) 90% and (B) the average of VWAP for each day during
the period commencing twenty (20) days preceding but not including the Dividend
Date.  If any Dividend Shares are to be issued on a Dividend Date,
then the Company shall within five (5) business days of the applicable Dividend
Date, issue and deliver to such Holder a certificate, registered in the name of
the Holder or its designee, for the number of shares of Common Stock to which
the Holder shall be entitled.

       

      Section
4.    
Voting
Rights.

       

      (a)     
Except as otherwise provided herein or by law and in addition to any right to
vote as a separate class as provided by law,  the holders of the
Series B Preferred Stock shall have full voting rights and powers equal to the
voting rights and powers of holders of Common Stock and shall be entitled to
notice of any stockholders meeting in accordance with the Bylaws of the Company,
and shall be entitled to vote, with respect to any question upon which holders
of Common Stock have the right to vote, including, without limitation, the right
to vote for the election of directors, voting together with the holders of
Common Stock as one class.  For so long as the number of outstanding
shares of Series B Preferred Stock is at least thirty percent (30%) of the total
number of shares of Series B Preferred Stock issued under the Series B Purchase
Agreement, the holders of Series B Preferred Stock shall vote together as a
single class with the holders of the Company’s Common Stock, and the holders of
any other class or series of shares entitled to vote with the Common Stock, with
the holders of Series B Preferred Stock issued under the Series B Purchase
Agreement being entitled to seventy percent (70%) of the total votes on all such
matters regardless of the actual number of shares of Series B Preferred Stock
then outstanding, and the holders of Series A Preferred Stock and Common Stock
being entitled to their proportional share of the remaining 30% of the total
votes based on their respective voting power as calculated under the Series A
Certificate and the Company’s Certificate
of  Incorporation.

       

      (b)     
If the number of shares of Series B Preferred Stock outstanding is less than
thirty percent (30%) of the total number of shares of Series B Preferred Stock
issued under the Series B Purchase Agreement, each holder of shares of Series B
Preferred Stock shall be entitled to the number of votes equal to the number of
shares of Common Stock into which such shares of Series B Preferred Stock would
be converted if converted on the record date for the taking of a vote
(regardless of the number of shares of Common Stock that the Corporation is then
authorized to issue) or, if no record date is established, at the day prior to
the date such vote is taken or any written consent of stockholders is first
executed.  Fractional votes shall not, however, be permitted and any
fractional voting rights resulting from the above formula (after aggregating all
shares into which shares of Preferred Stock held by each holder would be
converted) shall be rounded to the nearest whole number (with one-half being
rounded upward).

       

      
        
          
          

        

        
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      (c)     
For so long as any shares of Series B Preferred Stock shall remain outstanding,
without the affirmative approval of the Holders of 75% of the shares of the
Series B Preferred Stock then outstanding (by vote or written consent, as
provided by law), the Company shall not:

       

      i.     
in any manner authorize, issue or create (by reclassification or otherwise) any
new class or series of shares having rights, preferences or privileges equal or
senior to the Series B Preferred Stock;

       

      ii.     
adversely alter or change the rights, preferences, designations or privileges of
the Series B Preferred Stock;

       

      iii.     
amend the Company’s Articles of Incorporation or By-laws in a manner that
adversely affects the rights, preferences, designations or privileges of the
Holders;

       

      iv.     
increase or decrease the authorized number of shares of preferred stock of the
Company or otherwise reclassify the Company's outstanding
securities;

       

      v.     
redeem, purchase or otherwise acquire (or pay into or set funds aside for a
sinking fund for such purpose) any share or shares of Preferred Stock or Common
Stock; provided, however,
that this restriction shall not apply to repurchases of shares of Common Stock
from employees, officers, directors, consultants or other persons performing
services for the Company or any subsidiary pursuant to agreements that are
approved by the Board under which the Company has the option to repurchase such
shares at cost upon the occurrence of certain events, such as the termination of
employment, or through the exercise of any right of first refusal; and provided further, that this
restriction shall not apply to any conversion, redemption or other acquisition
of shares of Series B Convertible Stock pursuant to this Certificate, any
Transaction Documents or as contemplated under the Series A Financing
Transaction Documents (as defined in the Series B Purchase Agreement);
or

       

      vi.     
voluntarily file for bankruptcy, liquidate the Company’s assets or make an
assignment for the benefit of the Company’s creditors.

       

      (d)     
Until the expiration of two (2) years following the Closing Date (the “Restricted Period”),
neither the Company nor any Subsidiary shall (i) sell all or substantially all
of its assets, or (ii) at any given date during the Restricted Period, issue
debt any debt securities or otherwise incur any debt in a manner as to cause its
debt-to-equity ratio to exceed 50% without obtaining prior approval of the
Majority Holders. 

       

      (e)      For so
long as 20% of the shares of Series B Preferred Stock shall remain outstanding,
the Company shall not issue (i) any Preferred Stock (with the exception of the
Series B Preferred Stock issued pursuant to the Series B Purchase Agreement or
any Series A Preferred Stock issued under the Series A Purchase Agreement (as
defined under the Series B Purchase Agreement)), or (ii) any convertible debt
exchangeable or convertible into the Company’s Common Stock, without the consent
of seventy-five percent of the Holders of such outstanding shares
of  Series B Preferred Stock.

       

      
        
          
          

        

        
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      Whenever
Holders are required or permitted to take any action by vote, such action may be
taken without a meeting on written consent, setting forth the action so taken
and signed by the holders of the outstanding capital stock of the Company having
not less than the minimum number of votes that would be necessary to authorize
or take such action at a meeting at which all shares entitled to vote thereon
were present and voted.

      


      Section
5. Liquidation.
Upon any liquidation, dissolution or winding-up of the Company, whether
voluntary or involuntary (each, a “Liquidation Event”),
the Holders shall be entitled to receive out of the assets of the Company,
whether such assets are capital or surplus, for each share of Series B Preferred
Stock an amount equal to the Original Purchase Price , plus any accumulated but
unpaid dividends thereon (the “Liquidation Value”),
before any distribution or payment shall be made to the holders of any
securities which are junior to the Series B Preferred Stock upon the occurrence
of a Liquidation Event and after any distributions or payments made to holders
of any class or series of securities which are senior to the Series B Preferred
Stock upon the occurrence of a Liquidation Event.  Upon the occurrence
of a Liquidation Event, the right of the Holders to receive Liquidation Value
hereunder shall rank pari passu with that of the holders of Series A Preferred
Stock ( the “A Holders”).  If the assets of the Company shall be
insufficient to pay in full such amounts, then the entire assets to be
distributed to the Holders shall be distributed among the Holders and the A
Holders ratably in accordance with the respective amounts that would be payable
on such shares if all amounts payable thereon were paid in full.  In
the event the assets of the Company available for distribution to the holders of
shares of Series B Preferred Stock upon the occurrence of a Liquidation Event
shall be insufficient to pay in full all amounts to which such holders are
entitled pursuant to this Section 5, no distribution shall be made on account of
any shares of any other class or series of capital stock of the Company ranking
on a parity with the shares of Series B Preferred Stock upon the occurrence of
such Liquidation Event unless proportionate distributive amounts shall be paid
on account of the shares of Series B Preferred Stock, ratably, in proportion to
the full distributable amounts for which holders of all such parity shares are
respectively entitled upon the occurrence of such Liquidation
Event.  At the election of a Holder made by written notice delivered
to the Company at least two (2) business days prior to the effective date of the
subject transaction, as to the shares of Series B Preferred Stock held by such
Holder, a Fundamental Transaction or Change in Control shall be treated as a
Liquidation Event as to such Holder.

      


      Section
6. Conversion.

      


      (a)     
Conversion at Option
of Holder. Each share of Series B Preferred Stock shall be initially
convertible, into such number of shares of Common Stock based on the Conversion
Ratio at the option of the Holders, at any time and from time to time on or
after its issuance.  A Holder shall effect conversions by providing
the Company with the form of conversion notice attached hereto as Annex A (a “Notice of
Conversion”) as fully and originally executed by the Holder, together
with the delivery by the Holder to the Company of the stock certificate(s)
representing the number of shares of Series B Preferred Stock to be converted,
with such stock certificates being duly endorsed in full for transfer to the
Company or with an applicable stock power duly executed by the Holder in the
manner and form as deemed reasonable by the Company’s transfer agent for the
Common Stock. Each Notice of Conversion shall specify the number of shares of
Series B Preferred Stock to be converted, the number of shares of Series B
Preferred Stock owned prior to the conversion at issue, the number of shares of
Series B Preferred Stock owned subsequent to the conversion at issue, the stock
certificate number and the shares of Series B Preferred Stock represented
thereby which are accompanying the Notice of Conversion, and the date on which
such conversion is to be effected, which date may not be prior to two Trading
Days following the date the Holder mails such Notice of Conversion and the
applicable stock certificates to the Company by overnight delivery service (the
“Conversion
Date”).  If no Conversion Date is specified in a Notice of
Conversion, the Conversion Date shall be the Trading Day immediately following
the date that such Notice of Conversion and applicable stock certificates are
received by the Company. The calculations and entries set forth in the Notice of
Conversion shall control in the absence of manifest or mathematical
error.  Shares of Series B Preferred Stock converted into Common Stock
in accordance with the terms hereof shall be canceled and may not be
reissued.

       

      
        
          
          

        

        
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      (b)     
Adjustment of
Conversion Ratio. If the Conversion Price is adjusted pursuant to this
Certificate or the Series B Purchase Agreement, the Conversion Ratio shall
likewise be adjusted and the new Conversion Ratio shall be determined by
multiplying the Conversion Ratio in effect by a fraction, the numerator of which
is the Conversion Price in effect before the adjustment and the denominator of
which is the new Conversion Price.  Thereafter, subject to any further
adjustments in the Conversion Price, each share of Series B Preferred Stock
shall be  convertible into Common Stock based on the new Conversion
Ratio.

       

      (c)     
Automatic Conversion
Upon Change in Control.  Subject to Section 5, all of the
outstanding shares of Series B Preferred Stock shall be automatically converted
into the Conversion Shares upon the close of business on the business day
immediately preceding the date fixed for consummation of any transaction
resulting in a Change in Control of the Company.  A “Change in Control”
means a consolidation or merger of the Company with or into another company or
entity in which the Company is not the surviving entity or the sale of all or
substantially all of the assets of the Company to another company or entity not
controlled by the then existing stockholders of the Company in a transaction or
series of transactions.  The Company shall not be obligated to issue
certificates evidencing the Conversion Shares unless certificates evidencing the
shares of Series B Preferred Stock so converted are either delivered to the
Company or its transfer agent or the holder notifies the Company or its transfer
agent in writing that such certificates have been lost, stolen or destroyed and
executes an agreement satisfactory to the Company to indemnify the Company from
any loss incurred by it in connection therewith.  Upon the conversion
of the shares of Series B Preferred Stock pursuant to this Section 6(c), the
Company shall promptly send written notice thereof, by hand delivery or by
overnight delivery, to the holders of record of all of the Series B Preferred
Stock at their addresses then shown on the records of the Company, which notice
shall state that certificates evidencing shares of Series B Preferred Stock must
be surrendered at the office of the Company (or of its transfer agent for the
Common Stock, if applicable .

       

      (d)     
Mechanics of
Conversion

       

      i.     
Delivery of
Certificate Upon Conversion. Except as otherwise set forth herein, not
later than three (3) Trading Days after each Conversion Date (the “Share Delivery
Date”), the Company shall deliver to the Holder (A) a certificate or
certificates which, after the effective date of the Registration Statement
covering the sale of the Conversion Shares of such Holder (the “Effective Date”),
shall be free of restrictive legends and trading restrictions (other than those
required by the Purchase Agreements) representing the number of Conversion
Shares being acquired upon the conversion of shares of Series B Preferred Stock,
and (B) if applicable, a bank check in the amount of accrued and unpaid
dividends (if the Company has elected or is required to pay accrued dividends in
cash).  After the Effective Date, the Company shall, upon request of
the Holder, deliver any certificate or certificates required to be delivered by
the Company under this Section electronically through the Depository Trust
Company or another established clearing Company performing similar functions if
the Company’s transfer agent has the ability to deliver shares of Common Stock
in such manner.  If in the case of any Notice of Conversion such
certificate or certificates are not delivered to or as directed by the
applicable Holder by the third Trading Day after the Conversion Date, the Holder
shall be entitled to elect by written notice to the Company at any time on or
before its receipt of such certificate or certificates thereafter, to rescind
such conversion, in which event the Company shall immediately return the
certificates representing the shares of Series B Preferred Stock tendered for
conversion.

       

      
        
          
          

        

        
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      ii.    
Obligation Absolute;
Partial Liquidated Damages. The Company’s obligations to issue and
deliver the Conversion Shares upon conversion of Series B Preferred Stock in
accordance with the terms hereof are absolute and unconditional, irrespective of
any action or inaction by the Holder to enforce the same, any waiver or consent
with respect to any provision hereof, the recovery of any judgment against any
Person or any action to enforce the same, or any setoff, counterclaim,
recoupment, limitation or termination, or any breach or alleged breach by the
Holder or any other Person of any obligation to the Company or any violation or
alleged violation of law by the Holder or any other person, and irrespective of
any other circumstance which might otherwise limit such obligation of the
Company to the Holder in connection with the issuance of such Conversion
Shares.  In the event a Holder shall elect to convert any or all of
its Series B Preferred Stock, the Company may not refuse conversion based on any
claim that such Holder or any one associated or affiliated with the Holder has
been engaged in any violation of law, agreement or for any other
reason  unless an injunction from a court, on notice, restraining and
or enjoining conversion of all or part of this Series B Preferred Stock shall
have been sought and obtained and the Company posts a surety bond for the
benefit of the Holder in the amount of 150% of the Liquidation Value of Series B
Preferred Stock which is subject to the injunction, which bond shall remain in
effect until the completion of arbitration/litigation of the dispute and the
proceeds of which shall be payable to such Holder to the extent it obtains
judgment.  In the absence of an injunction precluding the same, the
Company shall issue Conversion Shares or, if applicable, cash, upon a properly
noticed conversion.  Nothing herein shall limit a Holder’s right to
pursue actual damages for the Company’s failure to deliver certificates
representing the Conversion Shares upon conversion within the period specified
herein and such Holder shall have the right to pursue all remedies available to
it hereunder, at law or in equity including, without limitation, a decree of
specific performance and/or injunctive relief.

       

      iii.    
Compensation for
“Buy-In on Failure to Timely Deliver Certificates Upon
Conversion.  If the Company fails to deliver to the Holder such
certificate or certificates pursuant to Section 6(f)(1) by a Share Delivery
Date, and if after such Share Delivery Date the Holder purchases (in an open
market transaction or otherwise) Common Stock to deliver in satisfaction of a
sale by such Holder of the Conversion Shares which the Holder was entitled to
receive upon the conversion relating to such Share Delivery Date (a “Buy-In”), then the
Company shall pay in cash to the Holder the amount by which (x) the Holder’s
total purchase price (including brokerage commissions, if any) for the Common
Stock so purchased exceeds (y) the product of (1) the aggregate number of shares
of Common Stock that such Holder was entitled to receive from the conversion at
issue multiplied by (2) the price at which the sell order giving rise to such
purchase obligation was executed. For example, if the Holder purchases Common
Stock having a total purchase price of $11,000 to cover a Buy-In with respect to
an attempted conversion of shares of Series B Preferred Stock with respect to
which the aggregate sale price giving rise to such purchase obligation is
$10,000, the Company shall be required to pay the Holder $1,000 hereunder. The
Holder shall provide the Company written notice indicating the amounts payable
to the Holder in respect of the Buy-In, together with applicable confirmations
and other evidence reasonably requested by the Company. Nothing herein shall
limit a Holder’s right to pursue any other remedies available to it hereunder,
at law or in equity including, without limitation, a decree of specific
performance and/or injunctive relief with respect to the Company’s failure to
timely deliver certificates representing shares of Common Stock upon conversion
of the shares of Series B Preferred Stock as required pursuant to the terms
hereof.

       

      
        
          
          

        

        
          9

          
            

          

        

        
          
          

        

      

       

      (e)     
Reservation of Shares
Issuable Upon Conversion. The Company covenants that it will at all times
reserve and keep available out of its authorized and unissued shares of Common
Stock solely for the purpose of issuance upon conversion of the Series B
Preferred Stock, each as herein provided, free from preemptive rights or any
other actual or contingent purchase rights of persons other than the Holders,
not less than such number of shares of the Common Stock as shall (subject to any
additional requirements of the Company as to reservation of such shares set
forth in the Purchase Agreements) be issuable upon the conversion of all
outstanding shares of Series B Preferred Stock.  The Company covenants
that all shares of Common Stock that shall be so issuable shall, upon issue, be
duly and validly authorized, issued and fully paid,
nonassessable.  The Company shall immediately, in accordance with the
laws of the State of Delaware, increase the authorized amount of its Common
Stock if, at any time, the authorized amount of its Common Stock, remaining
unissued shall not be sufficient to permit the conversion of all shares of
Series B Preferred Stock.

       

      (f)      
Fractional
Shares. No fractional shares shall be issued upon the conversion of any
share or shares of the Series B Preferred Stock, and the number of shares of
Common Stock to be issued shall be rounded up to the nearest whole
share.  The number of shares issuable upon conversion shall be
determined on the basis of the total number of shares of Series B Preferred
Stock the holder is at the time converting into Common Stock and the number of
shares of Common Stock issuable upon such aggregate conversion.

       

      (g)     
No Charge for
Conversion; Transfer Taxes.  The issuance of certificates for
shares of Common Stock upon the conversion of shares of Series B Preferred Stock
shall be made without charge to the converting Holders for such certificates.
The issuance of certificates for shares of the Common Stock on conversion of the
Series B Preferred Stock shall be made without charge to the Holders thereof for
any documentary stamp or similar taxes that may be payable in respect of the
issue or delivery of such certificate, provided that the Company shall not be
required to pay any tax that may be payable in respect of any transfer involved
in the issuance and delivery of any such certificate upon conversion in a name
other than that of the Holder of such shares of Series B Preferred Stock so
converted and the Company shall not be required to issue or deliver such
certificates unless or until the person or persons requesting the issuance
thereof shall have paid to the Company the amount of such tax or shall have
established to the satisfaction of the Company that such tax has been
paid.

       

      
        
          
          

        

        
          10

          
            

          

        

        
          
          

        

      

       

      (h)     
Absolute
Obligation.  Except as expressly provided herein, no provision
of this Certificate shall alter or impair the obligation of the Company, which
is absolute and unconditional, to pay the liquidated damages (if any) on, the
shares of Series B Preferred Stock at the time, place, and rate, and in the coin
or currency, herein prescribed.

       

       Section
7.     
Certain
Adjustments.

       

      (a)     
Stock Dividends and
Stock Splits.  If the Company, at any time subsequent to the
Closing Date as long as any shares of Series B Preferred Stock shall remain
outstanding: (i) shall pay a stock dividend or otherwise make a distribution or
distributions on shares of its Common Stock or any other equity or equity
equivalent securities payable in shares of Common Stock (which, for avoidance of
doubt, shall not include any securities issued pursuant to the Purchase
Agreements), (ii) subdivide outstanding shares of Common Stock into a larger
number of shares, (iii) combine outstanding shares of Common Stock into a
smaller number of shares, or (iv) issue by reclassification of shares of the
Common Stock any shares of capital stock of the Company, then the Conversion
Price shall be multiplied by a fraction of which the numerator shall be the
number of shares of Common Stock (excluding treasury shares, if any) outstanding
before such event and of which the denominator shall be the number of shares of
Common Stock outstanding after such event.  Any adjustment made
pursuant to this Section shall become effective immediately after the record
date for the determination of stockholders entitled to receive such dividend or
distribution and shall become effective immediately after the effective date in
the case of a subdivision, combination or reclassification.

       

      (b)     
Subsequent
Transactions.  Except as contemplated under the Series A
Purchase Agreement or the Series B Purchase Agreement, for so long as any shares
of Series B Preferred Stock shall remain outstanding, the Company shall not
effect or enter into an agreement to effect any transactions involving a
“Variable Rate Transaction” or an “MFN Transaction” (each as defined
below).  Following the Closing Date, if the Company enters into a
Variable Rate Transaction or MFN Transaction, despite the prohibition hereof and
in the Series B Purchase Agreement, in addition to other remedies that the
Company may have, the Company shall be deemed to have issued Common Stock at the
lowest possible conversion or exercise price at which such securities may be
converted or exercised and Holders shall be entitled to adjustment to the
Conversion Price pursuant to Section 7(c) hereof and receive additional shares
or other rights and benefits to the effect that Holder shall enjoy substantially
similar terms and conditions as those offered in the Variable Rate Transaction
and/r MFN Transaction. The term “Variable Rate
Transaction” shall mean a transaction in which the Company issues or
sells (i) any debt or equity securities that are convertible into, exchangeable
or exercisable for, or include the right to receive additional shares of Common
Stock either (A) at a conversion, exercise or exchange rate or other price that
is based upon and/or varies with the trading prices of or quotations for the
shares of Common Stock at any time after the initial issuance of such debt or
equity securities, or (B) with a conversion, exercise or exchange price that is
subject to being reset at some future date after the initial issuance of such
debt or equity security or upon the occurrence of specified or contingent events
directly or indirectly related to the business of the Company or the market for
the Common Stock.  The term “MFN Transaction”
shall mean a transaction in which the Company issues or sells any securities in
a capital raising transaction or series of related transactions on terms and
conditions more favorable than those granted to the investors under the Purchase
Agreements and related transaction documents.  Any Purchaser shall be
entitled to obtain injunctive relief against the Company to preclude any such
issuance, which remedy shall be in addition to any right to collect damages.
Notwithstanding the foregoing, this Section 7(b) shall not apply in respect of
an Exempt Issuance, except that no Variable Rate Transaction or MFN Transaction
shall be an Exempt Issuance.

       

      
        
          
          

        

        
          11

          
            

          

        

        
          
          

        

      

       

      (c)     
Price Adjustment Upon
Dilutive Issuances.

       

      i.     
For so long as any shares of Series B Preferred Stock shall remain outstanding,
following the Closing Date, in the event the Company closes on the sale or
issuance of (A) Common Stock at a price, or (B) any securities convertible into
or exchangeable for, directly or indirectly, Common Stock (“Convertible
Securities”), or any rights or warrants or options to purchase any such
Common Stock or Convertible Securities (collectively, the “Additional
Issuances”) with an exercise price or conversion price, which is less
than the Conversion Price then in effect (such lower sales price, conversion or
exercise price, as the case may be, being referred to as the “Lower Price”), then
and in such event, the Conversion Price shall be reduced, concurrently with such
issue or sale, to the Lower Price.

       

      ii.     
Notwithstanding anything to the contrary set forth in Section 7(c)(i), no
adjustment shall be made to the Conversion Price and/or the Conversion Ratio
with regard to (i) securities issued pursuant to a bona fide firm underwritten
public offering of the Company’s securities provided such underwritten public
offering shall provide gross proceeds to the Company of not less than
$20,000,000 and shall have been approved in advance by the Majority Holders,
(ii) securities issued (other than for cash) in connection with a strategic
merger, acquisition, or consolidation provided that the issuance of such
securities in connection with such strategic merger, acquisition or
consolidation has been approved in advance by the Majority Holders, (iii)
securities issued pursuant to the conversion or exercise of convertible or
exercisable securities issued or outstanding on or prior to the Closing Date,
issued pursuant to the Series A Purchase Agreement or the Series B Purchase
Agreement (so long as the conversion or exercise price in such securities are
not amended to lower such price and/or adversely affect the Holders), (iv)
securities issued in connection with bona fide strategic license agreements or
other partnering arrangements so long as such issuances are not for the purpose
of raising capital and provided that the issuance of such securities in
connection with such bona fide strategic license, agreements or other partnering
arrangements has been approved in advance by the Majority Holders, (v) Common
Stock issued or the issuance or grants of options to purchase Common Stock
pursuant to the Company’s equity incentive plans outstanding as they exist on
the closing date of the Series A Financing, (vi) the issuance or grants of
options to purchase Common Stock to employees, officers or directors of the
Company pursuant to any equity incentive plan duly adopted by the Board of
Directors or a committee thereof established for such purpose so long as such
issuances in the aggregate do not exceed ten percent (10)% of the issued and
outstanding shares of Common Stock as of the Closing Date and the specified
price at which the options may be exercised is equal to or greater than the VWAP
as of the date of such grant, and (vii) any warrants, shares of Common Stock or
other securities issued to a placement agent and its designees for the
transactions contemplated by the Series A Purchase Agreement or the Series B
Purchase Agreement (each an “Exempt
Issuance”).

       

      (d)     
Pro Rata
Distributions. If the Company, at any time after the Closing, shall
distribute to all holders of Common Stock (and not to Holders) evidences of its
indebtedness or assets or rights or warrants to subscribe for or purchase any
security, then in each such case the Conversion Price shall be determined by
multiplying such Conversion Price in effect immediately prior to the record date
fixed for determination of stockholders entitled to receive such distribution by
a fraction of which the denominator shall be the VWAP determined as of the
record date mentioned above, and of which the numerator shall be such VWAP on
such record date less the then fair market value at such record date of the
portion of such assets or evidence of indebtedness so distributed applicable to
one outstanding share of the Common Stock as determined by the Board of
Directors in good faith.  In either case the adjustments shall be
described in a statement provided to the Holders of the portion of assets or
evidences of indebtedness so distributed or such subscription rights applicable
to one share of Common Stock.  Such adjustment shall be made whenever
any such distribution is made and shall become effective immediately after the
record date mentioned above.

       

      
        
          
          

        

        
          12

          
            

          

        

        
          
          

        

      

       

      (e)     
Calculations.  All
calculations under this Section 7 shall be made to the nearest cent or the
nearest 1/100th of a share, as the case may be.  The number of shares
of Common Stock outstanding at any given time shall not include shares owned or
held by or for the account of the Company or any of its
subsidiaries.  For purposes of this Section 7, the number of shares of
Common Stock deemed to be issued and outstanding as of a given date shall be the
sum of the number of shares of Common Stock (excluding treasury shares and
shares owned by subsidiaries, if any) actually issued and
outstanding.

       

      (f)     
Notice to
Holders.

       

      i.     
Adjustment to
Conversion Price.  Whenever the Conversion Price is adjusted
pursuant to any of this Section 7, the Company shall promptly mail to each
Holder a notice setting forth the Conversion Price after such adjustment and
setting forth a brief statement of the facts requiring such
adjustment.

       

      ii.     
Notices of Other
Events.  If (A) notwithstanding Section 3(a), the Company shall
declare a dividend (or any other distribution) on the Common Stock; (B) the
Company shall declare a redemption of the Common Stock; (C) the Company shall
authorize the granting to all holders of the Common Stock rights or warrants to
subscribe for or purchase any shares of capital stock of any class or of any
rights; (D) the approval of any stockholders of the Company shall be required in
connection with any reclassification of the Common Stock or any Fundamental
Transaction, (E) the Company shall authorize the voluntary or involuntary
dissolution, liquidation or winding up of the affairs of the Company; then in
each such case, the Company shall cause to be filed at each office or agency
maintained for the purpose of conversion of the Series B Preferred Stock, and
shall cause to be mailed to the Holders at their last addresses as they shall
appear upon the  stock books of the Company, at least 10 calendar days
prior to the applicable record or effective date hereinafter specified, a notice
stating (x) the date on which a record is to be taken for the purpose of such
dividend, distribution, redemption, rights or warrants, or if a record is not to
be taken, the date as of which the holders of the Common Stock of record to be
entitled to such dividend, distributions, redemption, rights or warrants are to
be determined or (y) the date on which such reclassification is expected to
become effective or close, and the date as of which it is expected that holders
of the Common Stock of record shall be entitled to exchange their shares of the
Common Stock for securities, cash or other property deliverable upon such
reclassification or Fundamental Transaction; provided, that the
failure to mail such notice or any defect therein or in the mailing thereof
shall not affect the validity of the corporate action required to be specified
in such notice.

       

      
        
          
          

        

        
          13

          
            

          

        

        
          
          

        

      

       

      (g)     
Fundamental
Transaction. If, at any time while any shares of Series B Preferred Stock
shall remain outstanding, (i) the Company effects any merger or consolidation of
the Company with or into another Person, (ii) the Company effects any sale of
all or substantially all of its assets in one or a series of related
transactions, (iii) any tender offer or exchange offer (whether by the Company
or another Person) is completed pursuant to which holders of Common Stock are
permitted to tender or exchange their shares for other securities, cash or
property, or (iv) the Company effects any reclassification of the Common Stock
or any compulsory share exchange pursuant to which the Common Stock is
effectively converted into or exchanged for other securities, cash or property
(in any such case, a “Fundamental
Transaction”), then upon any subsequent conversion of this Series B
Preferred Stock, the Holder shall have the right to receive, for each Conversion
Share that would have been issuable upon such conversion absent such Fundamental
Transaction, the same kind and amount of securities, cash or property as it
would have been entitled to receive upon the occurrence of such Fundamental
Transaction as if it had been, immediately prior to such Fundamental
Transaction, the holder of one share of Common Stock (the “Alternate
Consideration”).  For purposes of any such conversion, the
determination of the Conversion Price shall be appropriately adjusted to apply
to such Alternate Consideration based on the amount of Alternate Consideration
issuable in respect of one share of Common Stock in such Fundamental
Transaction, and the Company shall apportion the Conversion Price among the
Alternate Consideration in a reasonable manner reflecting the relative value of
any different components of the Alternate Consideration.  If holders
of Common Stock are given any choice as to the securities, cash or property to
be received in a Fundamental Transaction, then the Holder shall be given the
same choice as to the Alternate Consideration it receives upon any conversion of
this Series B Preferred Stock following such Fundamental
Transaction.  To the extent necessary to effectuate the foregoing
provisions, any successor to the Company or surviving entity in such Fundamental
Transaction shall file a new Certificate with the same terms and conditions and
issue to the Holder new preferred stock consistent with the foregoing provisions
and evidencing the Holder’s right to convert such preferred stock into Alternate
Consideration. The terms of any agreement pursuant to which a Fundamental
Transaction is effected shall include terms requiring any such successor or
surviving entity to comply with the provisions of this paragraph (h) and
insuring that this Series B Preferred Stock (or any such replacement security)
will be similarly adjusted upon any subsequent transaction analogous to a
Fundamental Transaction.  Notwithstanding the foregoing or any other
provisions of this Certificate, in the event that the agreement relating to a
Fundamental Transaction provides for the conversion or exchange of the Series B
Preferred Stock into equity or debt securities, cash or other consideration and
the agreement is approved by the Majority Holders, then the Holders shall have
only the rights set forth in such agreement.

       

      Section
8.      Miscellaneous.

      


      (a)     
Transfer
Restriction.   The Series B Preferred Stock is not
transferable except as between Affiliates and as between China Hand Fund I, LLC,
a limited liability company organized and existing under the laws of the State
of Delaware and Vicis Master Fund (“Vicis”), which shall
not be deemed Affiliate to China Hand based solely on this Section
8(a).  Vicis may also transfer shares of Series B Preferred Stock to
its affiliates.

       

      (b)     
Notices.  Any
and all notices or other communications or deliveries to be provided by the
Holders hereunder, including, without limitation, any Notice of Conversion,
shall be in writing and delivered personally, by facsimile, sent by a nationally
recognized overnight courier service, addressed to the Company, at its principal
address as reflected in its most recent filing with the
Commission.  Any and all notices or other communications or deliveries
to be provided by the Company hereunder shall be in writing and delivered
personally, by facsimile, sent by a nationally recognized overnight courier
service addressed to each Holder at the facsimile telephone number or address of
such Holder appearing on the books of the Company, or if no such facsimile
telephone number or address appears, at the principal place of business of the
Holder.  Any notice or other communication or deliveries hereunder
shall be deemed given when received, and any notice by telecopier shall be
effective if confirmation of receipt is given by the party to whom the notice is
transmitted.

       

      
        
          
          

        

        
          14

          
            

          

        

        
          
          

        

      

       

      (c)     
Lost or Mutilated
Preferred Stock Certificate.  If a Holder’s Series B Preferred
Stock certificate shall be mutilated, lost, stolen or destroyed, the Company
shall execute and deliver, in exchange and substitution for and upon
cancellation of a mutilated certificate, or in lieu of or in substitution for a
lost, stolen or destroyed certificate, a new certificate for the shares of
Series B Preferred Stock so mutilated, lost, stolen or destroyed but only upon
receipt of evidence of such loss, theft or destruction of such certificate, and
of the ownership thereof, and indemnity, if requested, all reasonably
satisfactory to the Company.

       

      (d)     
Next Trading
Day.  Whenever any payment or other obligation hereunder shall
be due on a day other than a Trading Day, such payment shall be made on the next
succeeding Trading Day.

       

      (e)     
Headings.  The
headings contained herein are for convenience only, do not constitute a part of
this Certificate and shall not be deemed to limit or affect any of the
provisions hereof.

       

      (f)     
Amendment.  This
Certificate constitutes an agreement between the Company and the Holders. For as
long as any shares of Series B Preferred Stock shall remain outstanding, there
terms hereof may be amended, modified, repealed or waived only by the
affirmative vote or written consent of holders of a majority of the then
outstanding shares of Series B Preferred Stock, voting together as a class and
series.


      
        
           


        

        
          15

          
            

          

        

        
           


        

      

       

      RESOLVED, FURTHER, that the
appropriate officers or any director duly authorized by the Board be and they
hereby are authorized and directed to prepare and file a Certificate of
Designation of Preferences, Rights and Limitations in accordance with the
foregoing resolution and the provisions of Delaware law.

       

              IN
WITNESS WHEREOF, the undersigned has executed this Certificate this as of this
April 30, 2009.

      


      
        
          	 	 
	
                  James
      Li

                  Authorized
      Signatory

                	 
      


        

      


      
        
           


        

        
          16

          
            

          

        

        
           


        

      

      


      ANNEX
A

      


      NOTICE
OF CONVERSION

      


      (TO BE
EXECUTED BY THE REGISTERED HOLDER IN ORDER TO CONVERT SHARES OF SERIES B
PREFERRED STOCK)

      


      The
undersigned hereby elects to convert the number of shares of Series B
Convertible Preferred Stock indicated below, into shares of common stock, par
value $0.001 per share (the “Common Stock”),
of CHINA NEW ENERGY GROUP
COMPANY, a Delaware corporation (the “Company”), according
to the conditions hereof, as of the date written below. If shares are to be
issued in the name of a person other than undersigned, the undersigned will pay
all transfer taxes payable with respect thereto and is delivering herewith such
certificates and opinions as reasonably requested by the Company in accordance
therewith. No fee will be charged to the Holder for any conversion, except for
such transfer taxes, if any.

      Conversion
calculations:

      


      Date to
Effect Conversion:

      ________________________________________

      


      Number of
shares of Common Stock owned prior to Conversion:

      _______________

      


      Number of
shares of Series B Preferred Stock to be Converted:

      ________________

      


      Value of
shares of Series B Preferred Stock to be Converted:

      ____________________

      


      Number of
shares of Common Stock to be Issued:

      ___________________________

      


      Certificate
Number of Series B Preferred Stock attached hereto:

      _________________

      


      Number of
Shares of Series B Preferred Stock represented by attached
certificate:

      _________

      


      Number of
shares of Series B Preferred Stock subsequent to Conversion:

      ________________

      


      
        
          
            	
                    [HOLDER]

                  	 
      
	 
      	 
      	 
      
	
                    By:

                  	 
      	 
      
	 
      	
                    Name:__

                  	 
      
	 
      	
                    Title:____

                  	 
      


          

        

      


      
        
           


        

        
          17