So this quote is indeed referencing confucius, I have seen it pop up before. However it isn't so much a quote of confucius as paraphrasing his intent in english. I don't really blame Watts (Or whoever was before him if someone else said it first) for deviating so much, since you can't really cram an entire foreign philosophy explanation in one line.
The philosophy itself is one about a person's humanity/benevolence/heart for the greater good/love for mankind/eachother etc. It is one of the core virtues in confusianism and confusian writing, which is translated as virtue--or goodie good ness here-- original chinese term 仁. It shows up in a huge amount of confucian writing and quotes and comments on what to do and what not to do as a confucian person in society.
The quote in question is probably from the line 不如鄉人之善者好之其不善者惡之 this line is talking about how some "good" people are not popular because they are actually good, but because they are good at looking like they are good. Therefore they are just thieves stealing the title of benevolent, or "goodie goodness".
Basically a line referring to how people should see the truth of the situation and not just the surface layer. English quotes related to the same idea would be "hell in a hand basket" "two faced" or "wolf in sheep's clothing"