The proverb’s meaning is that just as fish prefer muddy waters and avoid clear streams, people generally do not associate with those who are too ideal in terms of ethics, manners, and habits. In other words, being strictly honest and always making the right choice from the standpoint of society-imposed values will result in you being isolated and having no friends.
I will now elaborate to better explain the idea. The idea is that there are some good reasons to keep very upright people at arm’s length:
If someone is too strict towards himself or herself, he or she is likely to judge others by his or her high standards, which may lead him or her to make big deals out of minor matters, criticize others, report them, and refuse to forgive even small accidental wrongdoings. In contrast, those who are not ideal have no difficulties accepting that others are not, too.
Very upright people are hard to cooperate with on matters where ethical flexibility is required. The ability to cooperate on such matters is important because problems sometimes arise whose only practical solution is to bend rules.
Brutally honest people tend to create awkward and problematic situations by being too direct and honest. Friedrich Nietzsche said about it, “If you want to offend somebody, just tell him the truth.”
Strict people often lack common sense and human understanding on the emotional level and, as a result, tend to take decisions based on abstract logical considerations. This can sometimes lead to awful practical outcomes because of a failure to take the feelings of others into account and see all circumstances and nuances of a situation.
Since there is no reason to be honest and upright just for the sake of being honest and upright, those who are always blindly honest and upright are likely to be close-minded, dogmatic people in the broad sense.
Intuitively led by the above reasons, many avoid associating with people who are too ideal from the standpoint of society-imposed values, and this is what the proverb is about.
I am curious whether this idea is commonly or idiomatically expressed in English. I did my own research, but found no close equivalent. One website says that the English equivalent is “too much of a good thing,” but that phrase is too generic and is even not specifically about human behavior, so I humbly hope that native English speakers can help me find a closer expression.
I cannot think of any particular English saying or proverb which encapsulates the idea of not wanting to work with someone who is irreproachable. In part this is because I see some of traits you ascribe to such a person are orthagonal to one another; for instance, being sincere is different from being sententious, and being scrupulous is different from being sanctimonious, and having one trait does not imply having the other.
That said, the general sense that someone can be “too good” is well-understood in the Anglophone world, and there are many expressions for such people themselves, if not for interacting with them. Sometimes, hesitation to interact with such people can arise from feelings of inadequacy or unwillingness to match their standard, but more often it is the suspicion that such people are simple and therefore naive, self-righteous and therefore hypocritical, or insincere and therefore generally dubious.
For example, someone might be compared to an archetype or famous example of a good citizen or humanitarian either to disparage or to praise. One may also deny being such a person to demonstrate humility.
Other answers have already pointed out several terms for people who are mainly interested in being perceived as good, or at least perceived as morally superior to you, but I do not think that is what your question is asking about. Someone who is ostentatiously well-behaved may be a goody two-shoes or a goody-goody, informally. If they like to compare their own behavior favorably to yours, they are acting holier-than-thou, or on a high horse.