Objective To investigate the clinical effect and safety of fumigation and steaming therapy with Jianghuang Powder in the treatment of neonatal jaundice with internal retention of damp-heat. Methods A total of 110 neonates with jaundice were randomly divided into treatment group and control group, with 55 neonates in each group. All neonates were given blue light irradiation; in addition, the neonates in the treatment group were given fumigation and steaming therapy with Jianghuang Powder, and those in the control group were given oral Yinzhihuang Granule. The course of treatment was 5 days for both groups. The clinical outcome and safety were observed for both groups. Results There was no significant difference in clinical outcome between the two groups (P>0.05). Both groups had a significant reduction in the serum level of total bilirubin after treatment (P<0.05), and there was no significant difference in the degree of reduction between the two groups (P>0.05). Compared with the control group, the treatment group had a significantly shorter time to the disappearance of jaundice and a significantly lower incidence rate of adverse reactions (P<0.05). Conclusion In the treatment of neonatal jaundice with internal retention of damp-heat syndrome, fumigation and steaming therapy with Jianghuang Powder has the advantages of a short time to the disappearance of jaundice, few adverse reactions, and a marked clinical effect.